"Instead of complaining that the rosebush is full of thorns, be happy that the thorn bush has roses" Anonymous
Many people have been asking me the same question over and over during the last several years- how did I develop my investing strategy and investing style, and what do I recommend to people who are just starting out? My answer to this question is always the same.
The key to success in the investing world, in my opinion, is simple. The first part is simply being consistently skeptical about everything you hear from the management, experts and the media in general. Remember, it is always in management's best interest to present all the facts in most positive light possible, so you have to focus on the negatives, as all the positives are usually conveniently highlighted in every press release and investor presentation.
I personally don't really care what management is saying 99% of the time, because the only thing you can learn from these speeches most of the time is only whether the management is completely incompetent, simply naïve or whether they more or less know what they doing. Other than that general determination, who really cares what they really say? They can't give you any real insights because of Regulation FD anyway. It's only the actual results that matter and numbers lie a lot less frequently than people.
As far as the mainstream media goes- information overload these days is completely overpowering and is simply becoming ridiculous. We get bombarded with opinions of various "experts" about the economy, bailouts, "once in a life time investment opportunities" etc. I chose to ignore 99% of the mess and only use the media as a contrarian indicator- I prefer to buy when others scream "Armageddon is coming" and love to sell when others are shouting "it's never been a better time to buy".
The second and the most important advice, I give to the "newly minted" investors is to keep continuously learning more and more about the entire investing world. Don't lock yourself in the box by reading just Buffet-like fundamental books. Learn the basics of technical analysis (behavioral finance) as well- too much money out there is now being driven by computer models to simply ignore it.
Also -focus on your mistakes more than on your successes -step back, look at the results from the prior year, analyze all the mistakes and force the euphoria from any successes somewhere very deep down into your head where it can't reach your ego. Instead focus on continuously making the necessary adjustments to your core investing strategy.
Yes, you heard me correctly- making changes to your strategy is the key part of achieving success in the long run! Forget about the "investing legends" and "experts" saying that you should develop The Strategy and stick with it no matter what. I think, it is simply a very flawed and frequently outright reckless argument that we have been fed for too many years! The "Buy and forget" strategy is completely dead and has been dead for many years, so is the "trade every time the wind blows" strategy. Focus on key macro trends instead and cut your losses quickly if you are wrong...
I am a CFA charter holder myself and thus know enough of fundamental finance and the CAPM to make a blunt statement- in my opinion, the core assumption of every traditional investing theory out there that investors make their decisions rationally is absolutely and positively flawed, period... How many more bubbles do we need to live through to realize that people use their emotions to make decisions more frequently than they do their rational senses?
Read the WSJ's article from yesterday article called "Investing Experts Urge 'Do as I Say, Not as I Do'".
It should offer an answer for any skeptic who still believes that "Efficient Portfolio Theory" is anything but a really cute statistical theory. The usual "bologna" of somehow using the historical data to develop the most efficient portfolio is simply silly. That is the main problem with today's investing - we rely too much on extrapolating past trends and assuming they mean anything... It is not quite as simple as that- if Markowitz himself doesn't buy it, why should anyone else?
"Dr. Markowitz first got to choose how to divide his assets between a stock fund and a bond fund not long after publishing his pioneering article "Portfolio Selection" in the prestigious Journal of Finance. Following his own breakthroughs, he should have made intricate calculations, based on historical averages, to find the optimal trade-off between risk and return. But, Dr. Markowitz told me, that isn't what he did: "Instead, I visualized my grief if the stock market went way up and I wasn't in it -- or if it went way down and I was completely in it. My intention was to minimize my future regret."
Dr. Markowitz paused, then added wryly: "So I split my contributions 50/50 between bonds and equities."
So instead of always sticking to your guns mantra- stay flexible. If something doesn't work- it's ok to change it! If you made the same mistake more than once- write it down and figure out why. Remember, no one is always right and thus it's ok to be wrong. I've spend most of my time over the last three weeks by reviewing my trades and articles from the past year. And while the overall results have been quite encouraging (all of my real life clients ended in the green in 2008 and my Strategy Lab portfolio over the last two rounds has ended in the green as well), I've made my share of mistakes here in the Lab, with the main one being the slow reaction to the reversal of the conventional long/short strategy back in August due to the hedge fund blow ups.
But I've made adjustments to my strategy since the summer both in the Strategy Lab and in the real world by introducing completely new assets classes to my strategy- like preferred stocks, closed-end ETFs etc. I also captured additional income from the insane volatility of last few months in the real world by developing and executing a strategy of selling out-of-money puts on stocks I was ready to purchase anyway.
None of the changes were easy, and most (like holding a lot of cash and the fact that I had to stop shorting individual names outright for the time being because of the incompetent SEC interventions) were not easy for my ego to swallow, it was all worth it at the end - in the end my job is all about making money- nothing else really matters.
Over the next few weeks I plan to make some serious changes to my blog as I am now in the process of completing my registration to become the registered investment advisor which will allow me to talk more about my real time investments and share some of my ideas and valuation models on a more "real time basis" with my readers. For now- stay safe and welcome to the New Year! Some changes are coming to my Strat Lab Portfolio as well- for now- stay safe out there.
Please visit my blog in the nearest future for more updates and send me your question at skepticalcapitalist@gmail.com
