5. My 30 investment 'lessons learned'
I’ve been working for a few years now, in a variety of different roles. I still can’t say that I really know what I am doing. But in that time I’ve written a bunch of stuff (mainly for my own consumption) on the topic of investing ‘lessons learned’. This post is a summary of that. It is just a list of things I suspect to be true. I wish somebody had given me this list when I just started out, but then again, I don’t think I would have really listened and internalized any of it as a rookie. Sometimes in life you have to experience stuff yourself or watch others experience it up-close. The ‘negative’ lessons are impactful and I felt their importance viscerally and immediately as I experienced them in real-time, but the more ‘positive’ lessons and patterns emerge only as you look back (and the neat illustration below reminds me of that).
The list of my 30 ‘lessons learned’ is below. Sorry in advance if you think that a lot of this obvious. In no particular order of importance:
After a certain point, reading investment theory has diminishing returns. It’s like comfort food, or like rewatching ‘Friends’ for the N’th time while doing laundry. It has no productive value.
When analyzing a business, define what product / service is fundamentally provided on a deeper level (what is the business’s “job to be done” for the customer, in Clay Christensen-speak). This perspective unearths new sets of competitors, more accurately defines addressable markets, and helps identify what a particular company is uniquely skilled at.
Founding, operating and scaling a business is really, really hard. Be respectful of that. At the same time, don’t fawn over a business too much, either - all organizations are dysfunctional and messed up in some way, even those that appear super successful to the outside world.
Any email or memo can be improved by making it at least 30% shorter.
There are 3 types of participant in the markets and the investment discourse: (i) a person who definitely doesn’t “get it”, (ii) a person who definitely “gets it”, and (iii) somebody where it’s too early to say.
Once you determine somebody is in that first category, you can safely ignore them. You don’t necessarily have to do the opposite of what they say, but just ignore them (delete their emails, etc).
In doing this kind of ‘classification’, hopefully you’re on the right side of Dunning-Kruger and if you are not, the hard feedback from the market has informed you of this.
Half the time, your boss & colleagues aren’t really paying attention to your emails and memos. So follow-up and hammer on the same points you’ve made relentlessly, until somebody asks you to stop.
Originality is way over-rated.
Some people are self-aware enough to understand their own personality and know their own tendencies early on, but for other people it will take a long time.
It never pays to be mean.
It’s fine to overweight the info you get from sources you hold in high regard. But if you use that info to make an investment, unless you duplicate some of the steps they took to get to their view, you’ll get shaken out of the position by non-fundamental price action.
The maxim that “you only have to be 60% right in this business to be successful” is dangerous. You won’t even get 60% unless you aim for 100%.
It’s a lot easier to study (and then stay invested in) a company where you can empathize with the customer, admire some aspect of the management and company culture, can develop a fascination with the industry’s history, or highly respect the founder’s entrepreneurial achievement.
If people who deal with you walk away feeling smarter, you’re more likely to get what you want, long-term.
Narrowing competitive advantages should be avoided.
A nuanced point or personal feedback is better conveyed via a phone call than a text communication.
If you are ready and willing to be introspective and talk about cases where you lost lots of money or prematurely sold (and haven’t bought back) a winner, no one will really think less of you. Talking about past failures will make both you and your colleagues better at imagining (and thus avoiding) future failures.
Some management personalities and industry sub-sectors are just cursed.
The relationship between ‘price’ and ‘quality’ is not linear.
Almost all principal-agent setups are flawed, but try to know when they are really messed up. The worse they are, the more likely you are to get hurt the longer you own the stock. People don’t care about this stuff enough.
There’s nothing wrong with just riding certain betas as long as this is understood by the relevant parties (you; your clients).
It can never hurt to seek out and interact (and try to learn from) people who you believe “get it”. One of the great joys of the investing profession is comparing notes on a business or industry with someone else who has been looking at it independently from you.
In the short and medium-term, narratives and stories matter. It is valuable to know when the balance shifts.
A market-weighted passive index such as S&P500 or the Nasdaq 100 is a formidable foe and most would be better off just sticking to that. 95% of the trading, research and stock-picking activity provides no value relative to the fees and the time spent.
In stock-picking, the idea that there are “many ways to skin a cat” is not 100% true. The longer the time horizon, the more you have to think as a business owner, as a business / industry analyst.
Even though people say that investment knowledge is cumulative and you get better as you age, the truth is that you can still forget stuff and have to ‘relearn’ old lessons from time to time. And you’ll actually get less confident about stuff, too. This is normal. You can admire the silver-haired PM with a great track record, but in reality they’re also still figuring stuff out and might have a bunch of well-hidden insecurities.
The business knowledge you gained from studying company X won’t get properly internalized for you long-term unless you also spend some time on understanding the value chain more holistically, i.e. the listed competitors, suppliers and customers.
Don’t ask the management team questions that are too challenging if you are in a group setting. Wait for a more private setting.
Ideally, look for a work environment where your colleagues are as obsessed as you are.
The notion that career opportunities and AuM will naturally accrue to the best performers is naive. Thoughtful marketing and salesmanship is required, both internally and externally. And externally, ESG will become a progressively bigger consideration.
Be cognizant that on average, the long-term prognosis for the stock-picking profession is bad and adjust your expectations and planning accordingly.
This list will undoubtedly change as time goes by - I’ll remove and update some entries as I make new mistakes or validate new patterns. I’ll try to keep the list as short as possible (I find lists lose some usefulness if they are overly lengthy).
UPDATE (September 2021):
I published the above list half-a-year ago. Looking back at it with fresher eyes now, I’d probably delete or rephrase point #5, and I feel I owe the reader an explanation of this reassessment.
For years, I believed categorising people is a useful tool to filter out for signal in a world full of noise. Everyone has an opinion and sometimes you have to disregard some of them; hence my original motivation for #5 (or so I thought, at the time) and the purposeful effort to ignore people who I decided don’t “get it”. Nowadays I believe this approach isn’t optimal anymore, for a couple of reasons. Firstly, classifying a person I disagree with as “dumb” or as someone who “doesn’t get it” is needlessly antagonistic and arrogant. Second, a person who I believe is highly misguided on a certain subject can evolve to become more nuanced on that subject, or he/she can have an uncommonly valuable understanding of another subject. People change; they never stay static. Similarly: someone who commands what I think is an impressive grasp of a particular subject today may end up losing that edge / expertise over time unless they keep working on maintaining it. People are dynamic, and so is the world around us. So it’s better to maintain a wide “funnel” of people from whom you get information or with whom you interact instead of going overboard with filtering too zealously. I’m learning that categorising people, even if it’s something as innocuous as “this guy knows semiconductors really well” or “that guy has the worst instincts and you should do the opposite of what he says”, can be counter-productive. Thus, I want to rephrase #5 to the following:
When interacting with others, focus on the data and arguments, not the person who is putting them forward. Allow for possibility that both your view and the other person’s view of the topic that you are discussing can change in the future.
Hopefully, by sharing the list publicly and making periodic updates in public, I’ll increase pressure on myself to be more accountable, i.e. remember and truly internalise the lessons that I think I’ve learnt, and try to live in a way that is aligned with them. The ultimate goal is to constantly try to improve my quality of thought, which in turn will be a big determinant of my LT investment results.