It’s about the Money, stupid.

 

It’s not about being right, being smart or being original.  It’s about the money, stupid.

 

Take a while and let that sink into your head.  Too many investors are Thinkaholics – people who suffer from the disease of overthinking.  A Thinkaholic with a big ego? That’s an even bigger recipe for disaster. I was definitely one of those big ego Thinkaholics.  Even now, from time to time, I still find myself straying back to my old ways.  The moment my thought processes start to get too complicated, and I start to pretend to understand things which I truly don’t, I will stop, pause, and remember the above statement before carrying on.

I have requests from people asking me to write about investment tips.  But before I even do that, I would like to start with the foundation, so this post will be based on the maxim above.

 

It’s not about being right

I had a friend who consulted me about investing after reading all the books I have passed him.  He heard that I was investing in ways that seem contradictory to the books, and found that there were books which countered the strategies of other books.  He was confused, “How come this book preaches this one way of investing, while that book preaches a totally different way of investing?  Which way should I follow?”

If you were to read every investment book and follow every thing religiously, you would find great difficulty investing.  Trust me, it happened to me. I was making bad decisions because I was buying on fundamental analysis and selling on technical analysis, or vice versa. I can only recommend that you must have a strong knowledge of yourself, your likes/dislikes, your strengths/weaknesses, your habits, your temperament, etc.  Read many books but take only those strategies that suit you.  Investing is very much like martial arts.

In the past, martial arts practitioners were always competing to see whose style is better or whose methods of fighting is the ‘right’ method, the best method.  Then came Bruce Lee, who showed the world that every martial art is unique in its own way.  He invented Jeet Kune Do, which was a combination of western boxing, wing chun, karate, taekwondo, muay thai, wrestling, etc.  Now, we have Mixed Martial Arts, where practitioners come from all backgrounds to compete.  Every now and then you will see a kooky KO clip of a Capoeira/ Muaythai fighter knocking out an opponent, or watch a Judo/Brazillian Jiujitsu practitioner become world champion.

Just like martial arts, there is NO RIGHT WAY of investing.  There are cigar-butt investors, who buy a number of cheap companies, and wait for them to realise their value.  There are growth investors, who buy stocks at PE of 100, undeterred by seemingly high valuations.  There are trend investors.  There are contrarian investors.  There are investors who go for asset plays.  There are dividend investors, shareholder yield investors.  There are investors who buy companies based on macroeconomic trends.  There are investors who buy good companies at fair value and just wait.  There are investors who simply just value-average the stocks as they go up or down.  There are investors who only invest in a couple of industries and ignore the rest.  There are investors who hold a portfolio of stocks in all industries.

You get the idea.

Instead of getting drawn into debates or arguments about the right way of investing, ask yourself, which are the techniques and strategies suitable for you?  Which are the ones you can discard?  Experiment and create your own Jeet Kune Do.  If people criticise your style, listen intently and take it as feedback from a different viewpoint.  They may have something you can learn from.  Do not be overly-defensive, but do not change your style just because they tell you that you are wrong.  Remember the maxim on the first line.

 

It’s not about being smart

Stocks have a way of boosting people’s egos and making every investor think that he is an expert.  This results in a certain kind of arrogance that spills over into overconfidence and thus affecting your decision-making negatively.  Issac Newton, the reknown physicist and mathematician who formulated the laws of motion and universal gravitation, went broke chasing the South sea stock bubble.  Mensa’s investment club, made up of individuals with more than above average IQs, made an average of 2.5% annually compared to S&P 500’s annual average of 15.3% from 1986-2001.

Smartness is not a factor in investing.  I have found that trying to be too smart is just as detrimental as being an idiot.

I had tried to act smart by pretending to understand businesses that I do not.  I had tried to act smart by pretending to understand investing strategies that I do not.  I had tried to act smart by convincing myself that my stupid decisions are smart.  The boundaries between acting smart and being stupid are very close.  What I find helpful is to remain disciplined, do your due diligence, constantly learn and acknowledge the fact that no matter how ‘smart’ you are, the market is beyond your control and will occasionally behave in irrational ways that we ‘smart’ people try to justify.

You may not have to be smart, but make sure that the company you invest in has a smart management.

Even Warren Buffet stresses on investing in your circle of competence.  As smart as he may be, he refuses to invest in tech stocks on the basis that he does not understand them.  So don’t act smart, have the discipline to stick with what you know.

Trying to be too smart is just as terrible as being an idiot.  Learn to stay humble and tread the fine line in between.

 

It’s not about being original

I don’t know about you but sometimes, after a long period of investing, I tend to get the urge to come up with creative plays or invest in companies off the radar.  I have an undying urge to prove that I can invest successfully myself, without any external influence.  I want to have my own stock ideas, uncover my own gems, be the one to tell people stories of how I had the foresight to find a 10 bagger myself.

Again, refer to the maxim above, our purpose is to make money, not to prove to anyone how good we are at stock-picking.

For this rule, you need to tame your ego or even better, get rid of it.

My best investment decisions were made when I let go of my ego and identify shareholders and managers with a track record of good decision-making.  Oh this shareholder is buying back shares of his own company?  That gives me a vote of confidence!  Wow, the management team is able to execute so efficiently and capture so much market share?  Take my money guys, it’s better off in your hands.  If there was a Peter Lynch fund I would probably dump half my savings in with full faith that he will do a better job than me.

Forget about your ego.  Learn from the experts with proven track records.  Don’t worry if people think you are just ‘copying’.  Remember at the end of the day:

 

It’s not about being right, being smart or being original.  It’s about the money, stupid.

 

 

   

This post was inspired by the Essays of Warren Buffet, in which he occasionally highlights how he stays within his Circle of Competence.

(Click on images to go to Amazon links of the book)

 

Horizontal Banner

2 Comments

  1. Pingback: Big Stack Poker – Investing in Businesses that Dominate | The Bf Gf Money Blog

  2. Pingback: Big Stack Poker – Investing in Businesses that Dominate

Leave a Comment

Your email address will not be published. Required fields are marked *