How to become an investor – a practical check-list

Topic: a practical check list for becoming an investor

Length: short

Conclusion: focus on the psychology not the maths; read books; continuously refine your strategy by objectively analyzing your decisions (good and bad)


Investing has very little to do with advanced math, statistics and accounting

Sure, you can take that approach, but unless you are talented and have a special interest in those areas, you’re unlikely to be able to compete with those that do*. Instead focus on getting the big picture right; avoiding big mistakes, and controlling your emotions. Use the one, single competitive edge private hobby investors still possess: patience and the lack of impatient clients and monthly update requirements. You can’t compete with high frequency trading algorithms or forensic accounting experts, but you can compete in low frequency trading.

* even professionals who are very skilled and experienced sometimes lose big, despite armies of analysts and accountants spending thousands of man-hours finding value – or lack thereof – hidden in company books (cooked or not). Quickly browse through my 50-point check list for fundamental investors if you’re interested in what you’re up against — and that’s the short version.


Start by reading books about the psychology of investing

I have a few suggestions on my blog (here). I will also soon make my video course on investing available through my and Ludvig’s podcast Future Skills. You might want to check it out, but don’t expect quality advice to be for free.

Another good place to start is my TAOS series of 12+ posts about important investor character traits, practices and habits (the site says 369$ but the artwork actually costs 199$; the price is right once you enter the store. The article series is free of course). You should also browse my previous articles on investing on my Best Of page.

A few of the suggested books are: Margin Of Safety – Seth Klarman, Reminiscences of a stock operator – Edwin Lefevre, The Most Important Thing – Howard Marks, The Black Swan – Taleb, The great crash – Galbraith, How an economy grows and why it crashes – Peter Schiff, The Death of money + The New Case For Gold – James Rickards, Fed Up – Danielle DiMartino Booth. And my own book.


There are dozens – if not hundreds – of viable strategies

The key is to find a strategy that is a good fit with your personality, not forcing yourself to comply with some kind of objectively optimal plan. Nothing beats actual experience on the financial markets so try to get some action as soon as possible to learn the ropes, both in terms of knowing yourself and the markets. Formulate strategies, backtest them, and try them out in demo accounts or with very small amounts of real money.

One more thing: investing on the financial markets does not mean stocks only. There are alternatives: commodities, precious metals, real estate, private equity, your own business, education or skills etc. I personally like the quattro stagione approach (read more here about choosing your investment strategy and building a multi-asset class portfolio)


Find (or create) a place where you can discuss and refine investment ideas and strategies

Avoid the typical gun-slinging machissimo stock trader forums where mostly guys post and brag about their best trades and mock anyone with a serious question. Investing is about truth-seeking, about eliminating unnecessary mistakes and losses, not about being right. Those obsessed with being right usually run into huge losses when they fail to admit their errors and cut their losses.


Trial by fire

As soon as you have a working and backtested strategy, start using real money (albeit small amounts). It’s the only way to stress-test your psychological constitution and verify your fit with that strategy


Make sure to create a feedback loop…

…by writing down your reasons (compliant with your strategy) for entering an investment, and following up on those reasons when you exit the trade. Analyze what went wrong, what went right, what was skill and what was luck. A well executed trade based on good decisions may very well end in a loss, and a string of bad decisions may create a gain. Don’t let your wins fool you into thinking the decisions were better than they objectively were.

Choose and formulate your ex-ante reasons for entering a trade in such a way that they are helpful in deciding when to exit, as well as analyzing whether the ex post result was luck or skill.

Refine your strategy with any new long-term insights you gather from every investment

Remember that both you and markets continuously evolve, meaning your strategy and investment method must too.


Summary

  1. Psychology is more important than maths in investing
  2. Read books and insightful articles about investing, not testosterone dripping online stock forums
  3. Find a strategy that suits you. Refine it in company with likeminded truth-seekers
  4. Use real money; it’s the only way to truly stress test your emotions and your strategy-psychology fit
  5. Create a feedback loop of continuous improvement, your work as an investor is never done
  6. Bonus tip I: it’s not easy, anybody who says it is don’t know what they are talking about (or are actively trying to fool you). Anybody who has simple one-dimensional solutions to the ‘problem’ of investing is either a narrow minded sheep destined for slaughter, or a snake oil salesman out to trick you.
  7. Bonus II: 10 newbie habits you should avoid (+watch CNBC all day long)

P.S. Don’t forget about my podcast Future Skills and the coming video course.

Investing is life and vice versa — just diametrical opposites

Topic: When to sow and how much. And when to harvest.

Conclusion: Yes

Length: One of my very shortest


Investing is the art of postponing

To invest means to give up the Present for better rewards in the Future. Investing entails among other things the risk of not getting a positive return, not being there for the return, and not least not enjoying whatever it is right now, i.e., you pay the price of time (including, but not limited to, aging and becoming a different person with other preferences).

You can invest on the financial markets (did you know some people only consider the stock market, the market for publicly listed stocks; that some even limit their investment universe to domestic stocks?!), in your knowledge and education, in your social and business networks, your skills, your health, or in just about anything. Sow. And harvest.

The hard question is what you actually want — money, fame, acceptance, recognition, praise, status, personal growth, self actualization? What is your purpose when you devalue the Present to the benefit of the unknown Future?

When you invest you risk creating a string of near misses, of never experiencing the moment in its full glory, always but not quite reaching that future you’re stocking with virtual gold. On the other hand, if you fully give in the the Now, the lack of planning may well reduce the available moments to experience to a suboptimal amount.


Do you choose No living or Some living?

If you are a natural Planner you risk devaluing the Present in favor of a Future constantly just out of reach. And if you always and totally live in the Now, you risk not getting that many of them.

I would go for some Now rather than none, if I could choose.

In any case, I’ve always been a hoarder, a saver, a constant postponer, an investor, a saftey junkie… up until I finally just stopped following the rules, the conventions, the “normal” path of high school, university, investment banking and managing a hedge fund. Now I’m faced with a daily struggle of trying to stay the course of exploration, living in the present while making sure there are as many presents ahead as possible. I take care of my sleep, my nutrition, my workout regime, my varied intellectual diet and relationships. I even invest mindnumbingly wisely (for the most part).

What’s next? Board meetings with stiffs in suits unable to understand the real purpose of growing a business? Actually, maybe. It’s a challenge. And under the right circumstances mutually beneficial.


For you?

Maybe seemingly unrelated to the post, but here are some practical snippets:

  1. You will be a completely different person in ten years; you don’t owe them anything, and they shouldn’t hold any allegiance to your decade-old vows
    1. A really sad example of life-wasting: “It’s always been a dream of mine to own a sports car”… so I’ve spent my best years in a basement slaving away as an accountant, and now I’m spending my freedom money on a car I don’t really want anymore… but that person, the young version of me I can hardly remember anymore wanted one at one point in time. Sad.
  2. If you actually are the same person ten years from now, you’re either delusional or stuck. Break out of your homeostasis, please
  3. Five years is typically a very long planning horizon
    1. except for financial investments; as long as they can run in the background without interfering with your life, employ them wisely in long term fashion and leave them be. Your resources will be there when you need them, if you come to need them — which like fire insurance you should hope you never come to.
  4. The author of “Cityboy” once told me when I asked his advice: “When the thought of staying two more years makes you nauseaus, quit that very day”. I took his advice in January 2014.
  5. The gaming industry understands: aim for intermediary bosses, celebrate your wins, enjoy the game, don’t waste your play solely on just winning the endgame.
  6. Nobody’s looking. At least nobody who matters, since the only one who matters is you.
    1. Do you remember when you were young and thought that your clothes mattered? As if other people would like you more or less if you bought clothes adapted to their tastes rather than your own. And as if they mattered if they did. Crazy times.

OK, final thought: Life is lived in the now, financial investments in the future — two completely different skill sets. Eat that marshmallow now; in the future you will shun sugar anyway, but invest for the long term (and hope you’ll never need it)

Remember that the most important part of a decision process is not weighing arguments, it’s establishing your purpose. The runner up factor is execution, so still not the mechanics of deciding. That is done by means of ranking arguments rather than weighing sides, and finding that one, clear reason that eclipses all else.


P.S. if you do happen to make a pros and cons list before breaking up with your girlfriend, make sure she never sees it.

Can the Netflixes and Amazons of the world ever beat both competition and regulation?

Topic: has any large company succeded after running large deficits in the beginning?

Conclusion: hit me with your best examples of companies with backstories like Netflix and Amazon that today report very large profits (global top 100)


This morning as I and my girlfriend had our morning coffee, we started talking about the ebbs and flows of new economy companies. Sometimes it’s radio or railways. Sometimes it’s IT or biotech — have both been through four waves so far, or is it more?

Right now, companies like Netflix and Amazon are running extremely hard to monopolize their market. Investors are playing along, hoping for a combination of both high market share and high profit margins in the future, when the economies of scale and network effect moat is wide enough to effectively cement their position as well as profitability.

Just imagine when Amazon is the everything store and no other company can even start competing, since their cheapest source of intermediate goods isn’t from their ordinary suppliers but from Amazon itself! Or when Netflix has 2 billion subscribers and own all the writer and actor talent there is.

A few things ocurred to us:

  1. If these companies are doing it right, then what will happen to other companies — old school companies? Actually, the churn rate among public large caps has increased for several decades, which is a sign that with every passing decade old, large, “wonderful” companies are getting more and more vulnerable to new economy competitors. Apparently the process of new style co:s overtaking oldtimers is already well underway…
  2. Does that mean The Netflixes of the world warrant a high valuation, or the General Motors a low one. Or both? But what if even newer companies will overtake companies like Netflix even faster in the future, i.e., that the churn rate keeps increasing? What if “VR-nano-artibio-fy co” destroys Netflix the way Netflix killed Blockbuster? Then all current S&P 500 companies warrant lower valuations than in the past.
  3. What historical examples are there of companies investing heavily in the beginning, running large losses and negative cash flows, and actually subsequently could reap the rewards of high market shares and high profit margins? Which companies among the world’s top 100 nominal earners have a history of such audacious investments? I couldn’t find any at a quick glance.
  4. My take is that if you don’t reasonably quickly find a way to profit from your operations, you won’t be able to charge enough from your clients in the future either. Either you don’t succeed in securing a near monopoly, or you do. In the former case, competition prevents you from super profitability and in the latter regulation does.

Please comment with links, charts and tables if you have good examples of companies that make very large profits today and that have a history of running very large deficits in the beginning of their existence. If they aren’t among the 100 largest earners don’t bother, since what’s interesting is if Amazon and Netflix are charting new territory or if it has been done before in the last half century.