Investing 101 - Skills No One Talks About
Should You Manage Your Own Money?
It is not easy to make money in the stock market.
“Even if I told you which stock or which ETF you should buy, most people would still not be able to beat the index.”
The reason is that it takes more than just knowing which ticker to buy to deliver market-beating returns and that’s what I will be covering in this article. I will be discussing a few key behavioral things, which you might not associate with investing, that one needs to master, in order to do really well in the stock market.
I also want to clarify, this process is from a fundamental point of view. There are many different ways to deliver index-beating returns in the stock market like trading based on technicals, focusing on one factor like Volatility or quality etc… However, my learnings shared below are based exclusively on investing based on fundamentals.
In future articles of this series, I will eventually cover some of these strategies but this article is specifically focused on exploring:
Underrated skills needed to be a good investor.
Should you be investing your own money or let a professional do it for you?
This is the second article in my Edu Series where I will be sharing things that I have learned about investing in the stock market. The first article which is kind of a pre-read is titled: Borrowed Conviction Rarely Works, the phrase borrowed from a tweet by Joe Fahmy.
Why is Investing So Hard?
Markets are often hard to predict because it tends to reward the less obvious. And that makes sense because if it is obvious, it is in the price, silly.
So when everyone agrees there is a massive rally coming, that is the time to be the most worried if you are positioned long.
Over the years, I have re-wired myself to think differently and I often find myself on the other side of the more obvious trades. When most of my friends are bullish, I am usually booking profit, when they are bearish, I am emptying my bank accounts.
Psychology: If you get a 30% discount on a shirt you wanted to buy, you’d obviously take it but when the same discount is available on a stock you have been tracking, you suddenly get cold feet.
No matter how much you say you'll buy it during the next dip, a lot of people don’t actually end up doing it because such moments often come with a lot of FUD (Fear, uncertainty and doubt). I would also add ‘lack of liquidity’ in such situations that prevent folks from buying what they wanted to buy, which is often not spoken about enough. Hedges help solve the liquidity issue but I digress.
It is really really hard to sell something that is doing very well, going up 2% everyday and it is very hard to buy something when everyone is selling, trust me on this. It is excruciatingly hard. The human mind is not wired like that.
I even posted about the FUD on Twitter when $TSLA was bottoming out at the end of Dec 2022.
On Dec 28th (day of the post), I purchased $TSLA at $108 and then on Dec 6th at $102, the 52 week low stands at $101.81.
ETFs Vs Stocks:
I’d argue ETFs require way less vigilance as compared to stocks.
You can manage your money yourself by using ETFs and can still beat the indexes as long as you can “set it and forget it”, which is easier said than done. And even with ETFs, you still need to know what you are doing and check your accounts at least once a quarter and re-balance at least once every few years.
However if you are looking for more alpha, then you need to look at stocks. And for stocks, you’ll have to genuinely want to learn & put in time to build the necessary skills. If you are willing to spend money and read other people’s research, you could cut down your time investment but some skills only come with practice.
What Skills?
“Even if I told you which stock or which ETF you should buy, most people would still not be able to beat the index.”
That is a loaded statement and I will use it a few times in this article to make my point. Let me break down why. I think in order to be a good investor, you need to have the following skills (I am still learning and I am very sure this list is not exhaustive):
A quick summary of the slide above:
First you need access to accurate data, decipher that data.
Identify actionable insight to figure out what will be the first order and second order effects - What instrument to use to get the desired return? How much return and by when?
Have the courage to make the investments at opportune times.
Show discipline, patience & conviction to follow through on the strategy
Execute the exit strategy and book profits.
Repeat & Re-invest
The first 2 steps in the illustration are the most time consuming. The rest are more behavioral and take practice.
Now let’s deep dive into these.
Information/News/Facts:
The most important thing you need to get started is accurate data. This is regardless of investing styles or principles. You need a good, trustworthy source of accurate data.
The world has changed a lot, information which was only available to a select few, is now available to you on your phone. Let’s take a listen to Guy Spier on The Compound & Friends talk about access to information in today's age of investing.
Hedge funds don’t have an edge on you in terms of information anymore. However, you might need to grab a subscription for one of the platforms that give you access to all this information.
This heavy reliance on news in my method is the reason why WealthWise is so heavily news focused. I think of what I am doing with Alpha Coverage as social service. I am giving out the raw materials that go into my system that I believe makes me a good investor.
Alpha Coverage is also available on YouTube and Instagram to make it convenient to keep up with the latest financial news.
Actionable Insights:
Having information alone is not enough, you need to be able to decipher that information and find actionable insights. You need to know what metrics to look at, how to evaluate those metrics and how to find winners and losers.
You need to figure out, for any given news, What will move, when? what will be the first and second derivative effect, which instruments are you going to use, what's going to give you the best bang for your buck?
Very often you will see that the news you anticipate drops as expected, but the stock/instrument doesn’t respond the way you thought it would. An example of this phenomenon is: “Sell the news”, which means that by the time the news hit, it was already in the price and people are selling the news to book profits instead of buying and taking the stock higher. The most recent example of this was the Q2, 2023 Nvidia earnings.
For insights, you can get help by listening to experts & reading other people’s analysis and research. While no one really knows what’s going to happen, taking in a diverse set of opinions can help you form your own opinion.
Courage/Temperament:
As mentioned earlier, I was buying $TSLA (and also $NVDA) in December 2022. They are now my #1 & #2 positions respectively. It did not feel good when I was buying, it never does and which is why I think it takes courage & temperament to make great buys because they often show up when there is max FUD. You can actually check the market’s fear indicator and you’d be pretty good at investing if you just buy when it hits ‘Extreme Fear’ & rebalance when it hits ‘Extreme Greed’.
I also think it is important to know where you are on the news curve in order to make courageous purchase decisions. Has the rest of the market already reacted to the news or did you find out about this thing in the first few minutes and the rest of the market is still to react?
Knowing where you are on the news curve can give you a lot of courage to make large bets.
Discipline:
Discipline to follow through on the strategy is the most difficult bit, in my opinion. Because the markets don’t move in a straight line and it’ll give you ample reason to second guess your strategy.
“Even if I told you which stock or which ETF you should buy, most people would still not be able to beat the index.”
The reason I say this and anchored this article to this quote is because most investors try to time the market, leading to:
Not have discipline to hold the investment through a market crash or
Not have the discipline to continue to invest during a market crash (when it is most profitable to invest)
Would end up not holding the investment long term to get short term gains (which could also leads to higher taxes, further reducing your net return)
I have shared before and I will say it again, the most important skill to make money in the stock market is discipline. You need to have a mechanical strategy and you have to respect that strategy religiously. Discipline is the only way to make money in the stock market sustainably. Without discipline, you can get lucky once or twice but it won’t take long for you to lose it all.
“Have a strategy, Execute your strategy” - I like to believe I came up with that.
I will be sharing my process in upcoming articles, so make sure you subscribe.
Patience & Conviction:
Very often you hear from great investors how they got into a stock very early only to sell it 6 months later and missing 10 bagger upsides, the most common one that comes to mind is Scott Galloway’s $ABNB incident.
You have to have conviction and hold onto things you like. It is very important that you either re-balance based on your strategy and take distribution when things go beyond your target allocation or you increase your target allocation.
Warren Buffett’s famous quote comes to mind: “The stock market is a device for transferring money from the impatient to the patient”. Cannot agree more.
Please refer to my pre-read article Borrowed Conviction Rarely Works for a more detailed understanding of why you have to build your own conviction & why that is important.
Exit Strategy:
Most of my friends who have been investing for some years now, often tell me that they still struggle with figuring out when and how to book profit. Some of my friends held $MRNA throughout the entire run up to $450+ and now back down to close to $100. You gotta have an exit plan.
Don’t fall in love with a stock, it is a means to an end. You have exposure to a business as an investment, so it can give you more in return which you can then use to improve your life.
I like to have target allocations. For example, if I want to hold $5K in a given investment. Let’s say that investment grew 40% and is now $7K. I will liquidate the incremental $2K and re-balance to $5K again. This way I maintain $5K exposure to the stock and also book $2K profit.
Now, if the stock drops below my $5K allocation, I will use that $2K to buy the stock again and when my investment goes above my $5K allocation, I re-balance again. I will keep re-balancing and repeating as long as I am invested in the stock.
If the stock keeps going up, then at some point, I might consider increasing my target allocation like I did for Nvidia - but that is rare, usually I would rebalance.
And one day I might lose faith in the stock’s ability to grow further, at which point, I will liquidate the entire position, regardless of my profit/loss situation.
Goal:
The goal is to take money from areas or investments you’ve done well in and move it to other investments that you think will go up while maintaining your allocation in the stocks that got you there. As things stand now, I have most of my money in stocks but I have now started moving whatever I make from stocks to a handful of ETFs that I have identified. I will be writing more about which ETFs in my retirement series soon.
Should you manage your own money:
If you understand the assignment and are willing to put in the effort to master the above mentioned skills, then you will see your portfolio performance improve over time. It could take years for you to see the impact of what you are doing but I started noticing it within 3-6 months.
Even if you just buy ETFs, you still need to have a Macro understanding of where the world is going > Still need courage/temperament to make good investments during FUD > Discipline is paramount > Patience, Rebalance > Clear strategy to exit > execute the strategy.
So I would stick to ETFs if I want to invest my money myself, without having the headache and risk of investing in single stocks because you really have to know what you own, especially if you are trying to beat the market because you won’t beat the market holding $AAPL and $MSFT. You have to do something extraordinary for which you might have to look at smaller caps and stocks that are less covered and dare I say less safe. I will write more about this in the next article in the Edu series titled: “The power of the Retail Investor”.
Consider buying stocks if you have the time to keep up with the news and analytical bent to understand what’s happening in real time, which is extremely extremely hard to do.
I found it very hard and mostly failed to convince people that October 2022 was the bear market low (still to be confirmed lol).
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
I reserve the right to change my mind if the facts change.
Disclosure: We own positions in some/all of the tickers mentioned in this article.