Monday, November 29, 2021

Lessons learnt in my first year of investing

 I've hit a bit of a busy patch and don't have enough time to flesh out more "how to invest" posts.

So, instead, I shall be writing about the lessons I learned in my first year of investing.

There are 3 things that really stand out to me, looking back now:

1. History always repeats itself

When you were growing up, do you remember when you first faced a problem you've never encountered or read about, seen something you've never imagined possible, or heard a voice/sound you never thought could exist? Yeah well, now that you are older, you would have realised it is just another thing or something you just have not experienced.

For me, the first time I became aware of this concept was when I was getting over being dumped or being rejected; which was it I cannot remember anymore - it seemed either one was a world ending experience; ah the naivete of adolescence hehe. I thought I'd never again meet someone who was special, or made me feel like there are singular things in the world worth taking a chance for at the risk of falling, or made me not to focus on just myself but to look around and see who else I can be of help to. Anyway, this cycle happened more than a few times and at one point, I just realised there is no the one perfect, match made in heaven Disney-esque person for you. At the core of it, we are all just apes who (or which?) have advanced in a few aspects of existence, looking for apes of similar values, and ideals to make more apes. But I gotta tell you, as an ape meeting another ape which shares the same values and ideals comes pretty close to finding that Disney princess. Ok, I side tracked but the point I wanted to make is that falling in love and out of love is just another part of history, albeit your history, that repeats itself, manifesting in different people who come and go in your live.

Looking at this in parallel with the financial markets, take the various crises that have happened during the last 20 years or so. The few of the top of my head are the Covid-19 crash in March 2020, European debt crises in the 2010s [I remembered I was working as a fund accountant, and many a european funds had to spin off (I'm pretty sure this isn't the right term but wtv -lah) their greek bonds in favor of new ones with revised terms and amounts - quite a tense moment and one where I thought the EU was surely kick Greece out - well luckily they didn't and Greece is still in the EU, albeit not doing very well], the global financial crisis in 2008 linked to the US subprime mortgage default [ This was particularly memorable because it was my first finance lecture of my first day in university - talk about setting the tone!] , the 2000 dotcom boom and spectacular bust, and the Asian financial crises of 1997.

In each of these events of varying severity, some people said the end of the world was imminent, some didn't care, some made preparations by going off grid, some pursued religion as a means to escape the clutches of crooked capitalism, and so on. In the end, like Newton's 3rd law of motion, for every action, there is an equal action in the opposite reaction. Or, if you like, the law of reversion to the mean will always ensure things don't go the extreme and that humans (at least most of us) will be able to survive and thrive.

 So, in short, bad things, good things, these things will always repeat in some form and degree, well into the future, long after you and I are gone. I guess that's why there's that saying, you are doomed to repeat history should you fail to learn from it.

2. Invest with your head, not your heart 

It is REAL easy to be tempted and swayed by the opinions of others when it comes to stocks especially if you do not have a framework to operate from i.e. why should you invest in company X, what do you know about it's business and industry, who and what will affect its future prospects, who runs the company, do you know enough or can you learn up about the company/industry with not too much trouble?

At least for me, even now, when I read a particularly good stock sharing or due diligence by someone else, I somethings think, "Yes, this might be a winner" - even without knowing a thing about the company, much less the answers to any one of the questions above. I believe, it is something in the human nature to want to believe in the possibility of success or may be it's just me ; I think I might be too optimistic a lot of times (yellow lights at 400m away? I can make it in time!).

There are upsides to being optimistic and trusting your gut at times, but in investing, trusting your head and letting it lead your gut will save you many a headache, heartache, insomnia, and mental anguish. The share market after all, is an emotionless machine - it is a machine that, in the words of my mentor, "acts a voting machine in the short term, and a weighing machine in the long term" . It does not know you own the stock and is not obligated to give you the returns you picture or fantasize in your head. Facts and numbers are infallible, but not investor sentiment. If you invest based on feelings, you will get heartbroken.

3. Do the work, don't just digest

It will do you good, a lifetime of good in fact, if you don't take things at face value but always do your own due diligence. It is one thing to just accept whatever info someone tells you, but actually going out to do the research, read up and learn all you can about a company gives you a conviction and knowledge that no one can take away from you. It gives you an understanding which people cannot bullshit through and which you can tell someone to get the fuck out coz you know your shit.

This leads me to: never be suckered into doing something just because everyone is else is doing it. Ever had the experience where you know you're right about something but everyone, from your friends, family to your 2 dogs, are convinced you are wrong? Yeah, you are gonna feel that quite a fair bit. But if you done your homework and you have the conviction - conviction from fleshing out your investment statement and making sure it fits the facts (not the other way round) - well prepare for massive vindication.

4. Do not be greedy, 

This one sorta ties in with point 2 but it bears mentioning to never be greedy! Especially today, it is so easy to obtain margin financing i.e. borrowing money to buy shares. Borrowing money to buy shares works both ways - you get to buy more shares with borrowed money and you get to enjoy higher returns when the markets go up. Conversely, when the market goes down, you also get to enjoy the greater amount of losses (yes I said enjoy, I am a sucker for pain). 

Lose too much, and you may end up losing more than what you can afford to. You may argue you can keep track and limit your borrowing. To that I say, kudos but why subject yourself to such pressure? One wrong miscalculation and you risk losing your car, house, or livelihood - this is especially crucial if you have kids/married, are you willing to stake the future of your marriage/spouse/dependents because you feel confident? Many a great man/women have fallen prey to overconfidence clothed in the guise of tempered confidence.

After all, you just want to multiply your gains no? Other than borrowing, there is the traditional method of just letting your money compound over time in the share market, and choosing great companies to grow them - it's not as exciting as using leverage, but it is a hell lot easier on your mental health than worrying if your margin account is enough during a correction. 

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