I have been thinking recently about how my knowledge and understanding of the theory and practice of investing has developed. In the twenty months I have been investing both serious time and money, I feel there are certain criteria which have helped me become a better investor. To that end, I have developed a list of 7 reasons for which this improvement has taken place. This list is not a ‘how-to’, and you may indeed disagree with one or more of the points on it. Nevertheless for me, these have been crucial in my development.
7 Reasons I’ve Become a Better Investor
1. I don’t allow myself to become bored
I first began investing with real money around six years ago, having had a relatively sizeable amount left to me in a will. Having read a few books by that point, I had some idea what I was doing. I had also been reading the ‘high-yield’ forum on The Motley Fool, and therefore decided the best course of action would be to buy a dozen or so large-cap, high-yielding companies such as VOD and RDSB and enjoy the dividend income. Marking my first foray into the investment world was exciting, and yet I picked a very defensive strategy to begin with.
You can probably guess what happened. I was logging into my account every half an hour to see what had changed. This went on for weeks, and was absolutely exhausting. Ultimately I ended up selling everything, for a minor profit, and moving onto something else. I still wonder what these investments would be worth today, had I held.
So my first rule has been to allow time to do its thing, and understand that investments are for life, not just for Christmas. I really like the ‘house’ analogy. When you buy a house, you don’t check what its price is every day, week, month or even year. So why do so with stocks?
2. Reading a lot
This one is an obvious one, and in part helps my first point. I have become better because I read a lot. I think anyone serious about managing their own investments will benefit from taking a keen interest in investing, business and economics. Adding to this, listening to podcasts has also helped me improve and broaden my understanding of markets. If you’re after suggestions, I suggest visiting my recommended listening page.
Reading books including What Works on Wall Street, One Up on Wall Street & The Intelligent Investor have all helped me refine my investing style and philosophy. I’m a keen advocate for taking books such as these and picking out the salient elements that have contributed to their respective authors’ success. I’m sure any successful investor would admit their success is built on the back of those they looked up to.
3. Listening to others
Few good ideas are born in a vacuum. I have found it extremely beneficial to be able to discuss and hear others’ investment ideas. Whilst I strongly believe in forging your own path, nobody is perfect, and you will always find someone who can share their experience to help illuminate that path.
This has been particularly beneficial for me with regard to those investments which are not doing as well. Lengthy discussions on Twitter regarding companies including NXT and DNLM have helped me clarify my positions, whilst at the same time allowing me to view them from different perspectives.
4. Not listening to others
It is all good and well taking advice from others, but ultimately you must have the courage of your convictions, for right or wrong. I believe it is one positive for me in that I am quite happy to make and stick to my own decisions, even when others are profiting from theirs. I refer back to the anecdote regarding Sir Isaac Newton and the South Sea bubble:
5. Not trying to time the market
This point is particularly appropriate at the moment. With markets in the UK and US reaching ever upward, conventional wisdom would suggest they are getting expensive (or certainly not cheap). An argument could be made that selling some (or all) investments and sitting aside in cash may be sensible, in anticipation of the next downturn. However I am certain more money has been lost trying to time the market than in buying and holding for the long-term. Quite aside from that, the cost and time involved is something I simply don’t have.
Investing whilst working full-time means that by design I have to take a fairly hands off approach to my portfolio. This, I believe, is of benefit to me as it helps me avoid the temptation to sell when investments have gone on a little run and are perhaps a little expensive. What goes up need not necessarily come down.
6. Maintaining a concentrated portfolio
As mentioned previously I work full time in an entirely different discipline. My portfolio currently contains 20 investments, which I feel is a sensible, manageable and sufficiently diversified number. Were I to have many more than this, I feel keeping up with them all would be unsustainable. Further to this, it would betray a possible notion that I lack a high conviction level in the investments I hold.
I read about, but never quite understand, those managers who have a portfolio of 50 investments, but who hold perhaps 20% in their top holding and 1% in their bottom. I would far rather hold an equal amount (as I do) in fewer stocks for which I feel have great promise.
7. Developing a circle of competence
Anyone who knows of Warren Buffet knows about his notion of a circle of competence. he advocates an in-depth knowledge of a few key areas rather than a vague knowledge of all areas. This one for me is last in the list because it is ongoing. If I had to describe my circle of competence it would be in following companies with high levels of free cash flow generation. I’ve said it before, but I do not invest in speculative companies who hold a lot of promise and are widely considered will be successful in the future.
I firmly believe investing is less about finding what to invest in, and more about what not to invest in. What makes these lists will obviously differ from person to person, but I feel I have made good progress in defining my boundaries for both.
If you’d like to discuss anything contained in this article, contact me on Twitter @britishinvestor, leave a comment below or leave a message via the Contact page.