Investment is about Having Experience, playing Smart, have knowledge of the Bigger Investors in the world and finally escaping fear.
It’s been very hard and I’ve been very scared. I sort of regret being interested in investing. Since 2012 I’ve had a return of about 85% per year on money I’ve invested. I started off very small and now it’s turned into a good amount.
Its amazing to me how little people study investing, even though it’s so incredibly difficult. I talk to “professional” investors all the time who don’t do what I consider to be the basics.
I'll explain all the secrets learned from Investment in detail, so you may need to be aware of all these reasons, take notes.
1# KNOW YOUR HISTORY
- study the history of investing. The history of money. Where did it come from. When were the first exchanges.
- Study modern investing. Why did the Great Depression occur. What was volatility like in the 1930s. In the 1960s. What caused the recessions in the 1970s. What caused the market to rise and then crash in the 80s.
- What were the actual bubbles in 2000 and 2006–7 that then led to massive crashes. Note: the answers are NOT “the internet” and “housing”.
- What are common features in every recession? In every bear market?
2# READ BIOGRAPHIES
Start with Warren Buffett. Then Bernard Baruch. Then read Greg Zuckerman’s new book on Jim Simons. Read Ray Dalio’s “Principles”. Read about Jesse Livermore. Carl Icahn. Jim Cramer. Victor Niederhoffer. Michael Milken. Charlie Munger. George Soros. Read all the Market Wizards books. Read about John Templeton, Peter Lynch, every investor you can find a biography of.
After you read each book, write down 5 things you’ve learned from each investor.
3# STUDY EVERY TYPE OF INVESTING
I never worked at a bank or a hedge fund, I was never force fed one particular style of investing.
Through studying and trial and error I had to learn each type and then figure out which ones worked for me the best. Each style is the best type given certain conditions and at different times.
To truly understand investing you have to know all of the types:
- value investing
- growth investing
- merger arbitrage
- convertible arbitrage
- options investing (understanding the “greeks”)
- private equity investing
- venture capital investing
- investing in bonds
- activist investing
- closed-end fund investing
- trade finance, investing in liens, venture debt investing, buying credit card debt, etc.
- country arbitrage (e.g. when Canada goes one way and the US goes another, under what conditions will they “snap” together.
- PIPE investing
- microcap investing and how it differs from buying larger companies
- hedging
4# READ ABOUT ENTREPRENEURS
Understand basic accounting and how companies often fool investors. Read about how to value a company. It’s more art than science but important to know.
Why do some companies trade at huge multiples over earnings and others don’t and never will?
To understand a stock, you have to understand how the underlying company is run and if it will be run well. You have to understand the CEO and he/she is good or bad.
I share with you this article where I'm talking about some common Entrepreneurs Mistakes that you should avoid Read it Here: What Are Today's Young Entrepreneurs Mistakes?
5# UNDERSTAND WHAT TRENDS ARE HAPPENING IN SOCIETY: Marketing, genomics, AI, big data, energy, etc.
What does society need, what will it need five years from now, who is working on it.
There is a quick way to do this:
6# THE MOORE’S LAW TECHNIQUE
In 1966, Gordon Moore, one of the founders of Intel, predicted that computing power will double every 24 months.
Computing power was very tiny then. But its been doubling every 24 months since he made that prediction.
Investing in an industry that is doubling every X months will lead to huge wealth. The computer / internet industry went from being in the hundreds of millions in value to the multiple trillions.
Some industries doubling or more every year or so: computers (still), genomics, solar power, data, AI, automation, etc.
Find as many “Moore’s Law” industries as possible, avoid the scams, and invest in the rest.
Find as many “Moore’s Law” industries as possible, avoid the scams, and invest in the rest.
7# STATISTICS
If you can, find an easy to use statistics package for testing out ideas.
For instance, what usually happens if the market goes down five days in a row? Or if Microsoft goes down five days in a row? What usually happens on a Monday if Friday was down?
What happens when Canada goes up and the US goes down? What happens the week after insider make a big buy on a stock?
There are thousands of questions you can ask the data. It helps to get a feel for the market.
8# IGNORE “TECHNICAL ANALYSIS”
People say things like, “there’s a resistance at 12 dollars a share so if the stock hits there it should bounce. But if it doesn’t bounce it could go the next level of resistance at $6”.
In other words, “the stock could go up or down”.
I’ve tested out every technical analysis theory. None of them work.
9# DON’T READ THE NEWS
By the time an article is in the Wall Street Journal or on CNBC, you’re the last investor to have learned the news.
10# KNOW THE BASIC RATIOS
P/E ratios, book value, P/S, % of stock that is in the float, income / debt, cash in the bank, etc.
11# ALWAYS ASK, “WHAT IS MY EDGE?”
You have no edge. If you think the iphone is great and you say, “I’m investing in Samsung” what makes you think you have an edge over the 100s of hedge funds who have studied every phone on the market, have figured out every detail of the next five phones to be released, etc.
You might get lucky. Or you might not.
It’s very hard for the average investor to find an edge. Warren Buffett gets an edge by doing deals directly with the company.
Big hedge funds find an edge by doing some form of insider trading.
Billions of dollars are spent every day subtly manipulating the market without regulators being aware of it. You don’t have an edge over those people.
How do you get an edge?
12# RESEARCH STOCKS THAT HAVE COLLAPSED
If a company misses earnings by two cents, often retail investors get scared and the stock collapses.
Ask, “did it collapse irrationally?” This is one of the few times you might be able to get an edge.
Note: most stocks collapse for rational reasons.
13# FOCUS ON MICRO CAP OR SMALL STOCKS.
Stocks that are worth less than a billion dollars.
These stocks are ignored by the news, they are ignore by banks, and they are often too small for the big hedge funds to research them.
They are also not in the big indices that have all the major funds following them.
Note that Warren Buffett made his first million only by investing in microcap stocks.
The problem with microcap stocks is that many of them are either scams or are in industries with no real interest by investors.
So use the Moore’s Law technique above to find growing industries and the stocks in them. And do the research to make sure the stock is not a scam.
Even ONE RED FLAG (the CEO used to work for another company that went to zero) is enough to say, “I’m not going to invest”. NO RED FLAGS ALLOWED.
You can have an edge on small stocks but it’s still hard.
14# CLOSED END FUNDS
These are like mutual funds but they trade like stocks. Find the closed end funds that trade below the added up value of all of their assets.
For instance, a closed end fund might have $100 worth of stocks but is trading for $90. Meaning: you can buy up the entire company for $90 and liquidate it for $100 and make money.
Why do they do this? Study closed end funds.
There’s often a good reason they are trading low but they are pretty safe and usually pay good dividends.
15# IMPORTANT RULE THAT NOBODY KNOWS: The less you invest in a company, the more you will make.
This doesn’t sound right and it doesn’t work for everyone.
But I know for me I have a problem: If I invest a big % of my net worth in one company then I will obsess on it.
I won’t be able to sleep.
And as soon as it has a reasonable profit (or loss) I will get rid of it.
If I invest a small amount and it starts to go up, I am more willing to sit on it for the entire ride and I will make more money.
This has happened to me again and again. The less I invest, the more I make.
I tend to invest only 1–2% of my net worth in any one investment.
16# Choose PRIVATE COMPANIES, they are usually better
Companies only go public when great investors no longer want to put money in. In fact, the venture capitalists want to get out so they force the company to go public.
The “public” is considered the weakest investors.
This is why the iniital investors in Uber made millions or even hundreds of millions of dollars but the people who bought when it went public are now losing money.
How do you find good private companies? Fortunately, more private companies than ever are being listed on crowdfunding sites like AngelList and Republic.
17# FOLLOW THE GREAT INVESTORS
Pick your 20 favorite investors.
If you can buy the same stocks around the same price or lower than it’s an ok investment.
For instance, if Warren Buffett suddenly buys a stock like IBM, then it’s probably a good buy at the same price. Buffett tends to hold for long periods of time so your edge over Buffett is that you can be more nimble.
18# CHECKLIST
- The CEO has built and sold a company before.
- Other good investors are invested in the company
- The company does not need to raise money for a long time.
This checklist is good for both public and private companies. For a private company it helps to add one more item: do they have any customers?
19# DIVERSIFICATION IS NOT WHAT YOU THINK
“buy Exxon and Microsoft”. One is oil and the other is tech. Now, those two stocks are no longer diversified. Most large stocks tend to move up and down as a group.
“buy bonds and stocks”. Now this is not as true. Bonds and stocks also tend to move as a group.
Diversification is to play multiple strategies that are independent of each other and independent of the economy.
An example diversified portfolio:
- some private companies
- some closed end funds (for the dividends) that focus on municipal bonds
- microcaps that are independent of the economy and each other
- peer to peer lending
- statistical arbitrage
- put selling on value stocks
- some growth investing (but keep investments small)
- investing in a basket of stocks owned by other great investors.
- special situations
20# DON’T DAYTRADE
Daytrading is mostly for idiots.
There are millions of algorithms working every day on the markets. How can you have an advantage over them?
There are strategies that work. But it’s like a fulltime job to play those strategies and you have to know them and really study them.
21# STOP LOSSES
Some people put “Stop-losses” on a position.
This means if they buy a stock at $100, they may decide at $90 to sell it for a loss. Don’t do that I’ve tested out every strategy using software I’ve written. In every case, the use of stop-losses make less money in the long run.
The key to sitting on your hands is to invest only a small amount in every investment.
The path to wealth is to have good investments that grow very big.
22# THE AVERAGE HOLDING PERIOD IS A LONG TIME
Buffett says the average holding period is “forever”. He is lying when he says that because he’s afraid smaller investors will be more nimble than him.
BUT…most companies I own I will own for 5–15 years. I am in some investments right now since 2009.
People say investing is like gambling. This is sort of true. But the longer you hold something, the less it is like gambling and the more it is that you researched an industry and a company and are investing in the growth of both.
It takes a long time for a small company in a small but fast growing industry to reach its full potential.
Also, if a company is growing 20–50% per year or more, where else are you going to get that kind of return on your money? Keep the stock. Don’t take profits.
Again, this is why I keep initial position sizes low and I never double down.
23# BIBLIOGRAPHY. KEEP READING
Here are a few books one can read that I think are fairly simple to read and will give a basic understanding of most of the above.
- Buffett, by Roger Lowenstein
- My Story, by Bernard Baruch
- The Money Game, by Adam Smith
- You can be a stock market genius, by Joel Greenblatt
- The Big Short, by Michael Lewis
- The Man Who Solved the Market, by Greg Zuckerman
- The Rational Optimist by Matt Ridley
- Hacking Darwin by Jamie Metzl
- Fooled by Randomness by Nassim Taleb
- Tools of the Titans by Tim Ferriss
- Sapiens by Yuval Harari
- A Man for All Markets, by Ed Thorp
- Famous First Bubbles by Peter Garber
- Confessions of a Street Addict by Jim Cramer
- Essays of Warren Buffett by Lawrence Cunningham
There are just a few books, you may go far where you can master Investing. I hope you guys enjoyed this article.
Lbiinga
Getting Rich From Scratch
