Six Investing Lessons I Wish I Learned Earlier
Simple money lessons from a life in the markets.
Welcome to Overlooked Alpha. Subscribe below to get our best investing ideas in your inbox every Sunday morning:
Every investor has a story about how they first got into the market. For me, I used to come home from school and watch the Money show on the BBC. I would pick a handful of companies then check-in to see how their shares had performed.
Growing up in the 1990s, I remember there being a lot of news coverage of investment bankers and the size of their bonuses. The more I learned about the industry, the more it intrigued me.
However, despite an early start I still managed to rack up a large number of mistakes, which looking back, have cost me a lot of money. So here are six things that I wish I’d learned earlier about investing and money in general.
1. Always Be Saving
When I was around nine years old I shared a paper round with a friend from school. We got paid five or six pounds each and I got pocket money on top. It wasn’t much but I got in the habit of saving it. Instead of spending the money on sweets, I took great pleasure in stacking up the coins, counting them and watching them grow.
But somewhere along the way my interest in saving money dwindled. I barely saved anything in my teenage years or my early twenties. To tell you the truth, my employment income was pretty unstable. But, also, saving money didn’t seem like something many people did. Western culture seems to prefer spending over saving, and my friends and I were no different.
But the lesson here is to always be saving. Even if you can only save $10 a month, it’s worth doing so because it builds up the habit. Even small amounts can make a big difference over time. Always be saving.
2. If You Can Save, You Can Invest
Around the time I finished University I received about twenty thousand dollars of inheritance money. It seemed like a huge amount at the time. But being young and full of vigor I wasn’t interested in investing it. Instead, I used the money to import memory sticks from China. I thought I was going to be the next Richard Branson.
To tell you the truth, it wasn’t a bad idea and could have made a lot of money. The problem was I wasn’t mature or sensible enough to run a business. I got tired of going to the post office every day to send packages. I lacked experience and I soon lost interest.
The thing is, if I’d put that money into the S&P 500 in 2002, it would be worth almost $140,000 today. But the thought never crossed my mind.
The real lesson is to think about your future and start investing early. If you can save some money (even a little) then you can invest it. The sooner you start investing in a selection of diversified stocks, the better off you’re going to be in the long run.
3. Educate Yourself About Investing
Part of the reason why I never invested money growing up is that I was never taught to. For the first quarter century of my life, I can’t recall anyone ever saying that investing in the stock market was a good thing to do. Property, maybe, but shares? They were too risky. Even studying business and economics at school, investing for yourself was not really taught. I guess that falls under the bracket of personal finance.
I don’t know what they teach at school these days, but at least online you can get a lot of good information about investing. I get the impression that young people are a lot more educated about personal finance than we were. But still, there are so many people who think they can get rich in cryptocurrencies or NFTs which is a huge mistake.
Investing in companies (real money-making businesses) has been around for centuries and is a proven method for growing wealth. Cryptocurrencies and NFTs, on the other hand, have been around for less than twenty years and are totally unproven. Putting money in these assets is not investing.
4. Avoid Short-Term Trading
A little while after University I got a job trading futures. It was my job to make money off small movements in intraday prices. I had to trade frequently and stay glued to the market. But even with access to the best data, best news and best tools it was difficult. This type of trading also brings out a range of primitive emotions, most of them negative.
In some ways, holding a trade for a short period is a good idea because it reduces your risk. You’re much less likely to experience a market crash if you’re in the market for only a few seconds. Of course, the opposite also applies. Since you’re only in the market for a short time, it’s harder to generate a large profit. And if your profit isn’t large enough, it won’t cover the cost to trade. That might be the broker commission, the bid:ask spread or your daily overheads.
A lot of people believe that commission-free trading levels the playing field, making short-term trading easier but this is false. Investors still lose money on the spread and brokerages like Robinhood sell your order flow to bigger players.
There will always be a cost to play and it’s this cost that turns most short-term trading strategies into losers. Short-term trading ends up more like a casino game like Roulette where there’s no chance of coming out ahead. I’ve placed thousands of trades in my career and I’ve learned that short-term trading has an extremely low probability of success.
5. Think 18 Months (Or 10 Years) Ahead
One of the biggest mistakes I see investors make is they frequently use backward-looking data to make forward-looking decisions. In other words, they make investment decisions based on the past instead of the future.
This is understandable because predicting the future is difficult. And history is often as good a guide as any. However, using past data can be less valuable because that data is what’s priced in. Often, the best money is made by going against the consensus. So it’s important to try and visualize future scenarios and consider how prices might change if certain scenarios play out.
Druckenmiller likes to say you need to be thinking at least 12-18 months ahead if you want to keep up with the market. Buffett says you should buy companies that you’d be comfortable owning even if the stock market closed down for ten years. Whatever your timeframe, it’s crucial to think forward. Past data is useful but it isn’t everything.
6. Beware Of Commitment Bias
Over the years I’ve also learned there are many biases that inflict pain on investors. Many of them are built-in and a product of our evolution. To discuss all of them would require its own textbook so I just want to focus on one called the commitment bias. This bias stems from our inability to walk away from things that we’ve worked hard on, or spent a lot of time on.
In the case of investing, commitment bias becomes dangerous during the process of analyzing a stock. The main issue is that to analyze a company (any company) takes a huge amount of time and effort. You could spend 40 hours digging into a company’s history and still barely scratch the surface. However, the more time you spend analyzing a company, the more attached to it you become.
After spending so much time and effort analyzing a stock it’s only natural you want to see some fruit of that labor. It’s very difficult to spend a month working on something and then walk away without acting on it. In reality, of course, the fact that you spent so much time researching a company should have no bearing on the decision to invest in it or not.
One way to get around this problem is to analyze companies you already know a bit about. This cuts down the research time and the likelihood of bias. Another way is to start your search broad and only dig deeper after you think you’re onto something. For me, this consists of running stock screens and reading a lot of ideas.
If you read two ideas a day, you can cover 14 ideas in a week, the same time it might take to research only one idea on your own. You can then decide if any of those ideas are worth pursuing further and, importantly, what further work is required.
For me, this is the true value of financial research. It greatly speeds up the hard work of investing and it simultaneously reduces the risk of commitment bias.
If I had known all of this when I started my investing journey, I’d be a lot better off.