(This blog entry was originally published in 2010)
10 years ago, I had an article published in Forbes magazine under the title "Words of Wisdom". It was generous of Forbes editors to rename the article "Words of Wisdom" as the original title I submitted it under was "My Failure"; I called the article "My Failure" because it dealt with the reasons that lead to my losing of the small fortune I accumulated during the technology boom of the late 90s and early 2000s.
A decade has passed since this experience, I lost a lot of hair since then!, gained few kilos and found the woman of my dreams, but during the last 10 years, I never called it quits and I kept trying to make it in the stock market, and tried I did; within that time I read hundreds of investment books, talked to dozens of investors, searched, analyzed and studied biographies of an endless number of famous investors such as Warrn Buffett, George Soros, Seth A. Klarman, etc. Also along that time I kept putting money in the stock market, at times I did well and at others I didn't, but eventually I managed to pull it off and today I have retired at age 31 due to a fortune I have accumulated in the stock market.
Thus at this occasion, I wish to share the lessons I have learned since I wrote that Forbes article at age 22. Lessons that have been the key to my success:
- Letting profits run: out of everything I have tried, letting my profits run is the most important of them all, one of the key mistakes I often committed was selling winners early and keeping losers in my portfolio, whenever my stock showed a gain, I had this constant fear that the gain would go away and that I needed to lock the gains, yet when a stock showed a loss I had confidence that it would certainly rebound; taming this bias was extremely hard, yet the goal was simple: be scared when you show a loss, be confident when you show a gain. As I conquered this fear, I hit several multi-fold winners with gains often running more than 200%, 300% or even 500%.
- Small or no leverage: Staying away from excessive leverage has been another pillar of my success, the temptation of using leverage is immense, but the misuse of leverage is equally immense in its consequences; staying away from leverage has served me extremely well during the collapse of 2008 and early 2009, as the stock markets sunk around me, I didn't have the fear in my stomach of that revered margin call; and with less fear, irrational decisions could be avoided.
- Focus on Fundamentals: A decade ago, early in my investing career, I was going with the "wind" if money was chasing the .coms, I was chasing the .coms, if money was chasing networking stocks, I was chasing them too, and so on, I was looking for stocks and sectors in fashion; overtime my focus evolved toward the fundamentals, and by that I mean: sales, profits, management execution, valuation multiples, industry comparisons and realistic expectations for performance going forward. This focus on fundamentals has lead me to multiple winners, some of them I wrote about in my Seekingalpha blog, but most importantly this focus averted me a lot of disasters!, and in the process guaranteed my survival, enhanced my returns and helped me think as a part owner in the companies I held and not as a simple speculator or gambler on a given stock.
- Taking advice: For many years I struggled with taking criticism or listening to others points of view. I was always focused on my own analysis, my own views and my own expectations, but transitioning to an open mind has helped me a great deal; of course I don't have to accept everything I listen to, but I started giving it real consideration, always examining my decisions, trying to see if the "other guy" had a point, trying to see if I am missing something they see. This interaction has certainly helped in making me a better investor, it helped me catch my mistakes earlier, while it re-enforced my good decisions.
- Objectivity: being objective from time to time is not difficult, we are all able to do it, but being objective all the time is the real challenge. The difficulty with being objective all the time, at least in my case, was due to the influence of my positions on my logic; it is extremely hard not to be bullish when you are fully invested and your portfolio is long, but as the constant flow of information on the micro and macro levels comes your way, it is vital that this information is processed without the influence of your investments. Humans have several behavioral shortcomings, one of them is labeled: the conformity bias, they will often search for information that supports their stance, rather then building their stance based on the information they receive. Fighting this bias is not an easy task, but an important one and it has been a key factor in making me a better investor.
- Investment funds: investing money that I don't need and that I have allocated for investment purposes is of essential importance when it comes to investing in the stock market. A key reason for this is that an investors time frame and the markets time frame are not necessarily in sync and often are not; knowing which investment will yield above average returns is a difficult task to start with, but knowing which investment will be a winner and when it will reach its potential is close to impossible, thus timing one's investment to an artificial calendar is extremely detrimental to good investment performance.
- Patience: If there is a commodity that is trading at an all time low today, it has to be "patience": we live in the world of the "now", in the world of the "instant", in the world of "CNBC" where stock prices change every minute, every second and on every market around the globe. We live in a world that is racing ahead (often aimlessly); but in the real world, in the real business world, companies and people do not make things happen at the speed of an up tick or a down tick, managers still need to analyze, execute, research, manage, motivate and plan ahead; employees still need to crunch numbers, build widgets and serve clients, people in the real world must deal with regulations, with the limitations of the physical world, with 24 hours in a day; major accomplishments need time to happen, an investor must be aware that no great businesses were created overnight, and thus no great fortune will be built overnight.
I would like to end this article by saying that I don't believe that there is a hidden magic formula in the stock market; the old adage of "buy low and sell high" remains as true as ever; reading income statements, balance sheets, cash flow statements and looking at valuations will help you identify what is cheap - the "buy low" side -, but this is only half the story, to reach that important "sell high" side of the equation you have to learn about yourself, to understand your weaknesses, to resist your demons and to fight your biases; if you conquer yourself, you will conquer the stock market.
Words of Wisdom (Dec 25th, 2000):