This weekend marks the third year of my ‘proper’ investing journey (i.e. investing with a decent amount of money). Whilst I have been investing for longer than that, it was with far smaller sums, and fortunately I made most of my mistakes during this time. So today I wanted to share a few things I’ve learned that may help others going forward.
Evolution, Not Revolution
Perhaps the most important thing I’ve learned is that investing is an iterative process. You don’t come to the table with all the tools you need, nor a complete understanding of what fits your investment framework. I’ve been trading/investing for nearly a decade now, but I only began to take it seriously when I was confident I had reached the point whereby I felt I knew *enough* to adequately create a basket of good quality investments.
I knew still had a lot to learn, but I felt I’d made enough mistakes already to be able to identify companies that should do well in the long-term. The mistakes I’ve made are ones most people have. Placing too much weight on the opinions of others on message boards. Buying into oil/gas companies who show a lot of ‘promise’ but somehow never deliver. Getting caught up in the excitement of a high-flying share price. You probably recognise some of these.
Three years in, and I’m still learning.
I learned early on what the basic valuation metrics meant. Price/earnings, price/sales, price/book, etc. They made sense to me. Paying ten times a businesses earnings sounded more appealing than paying thirty times. Paying for a company trading at less than the value of tangible assets minus all liabilities sounded great.
I’m drawn instinctively to the more quantitative aspects of valuation. For a mathematically minded person it’s easier to break a company down into numbers than it is to dive deep into the ‘story’ of that company. Professor Aswath Damodaran is a champion of learning how to do both, something I am still working on today. If you’re interested in learning more about this, I’d suggest his most recent Google talk.
What I have also learned is that there’s a difference between understanding the concept of say, return on equity, and really feeling how it affects the flow of a business. Writers like Phil Oakley and Richard Beddard have been instrumental for me in helping me break down the operations of a potential investment. As Warren Buffett says, ‘accounting is the language of business’. I’ve a long way to go to improve my fluency.
No list is complete without acknowledging the role of luck in my performance these past three years. I’ve made investments that I perhaps didn’t really understand that have nevertheless worked out well. As an example, my best performing holding has been Creightons PLC (LSE:CRL). I first purchased Creightons in October of 2015 for a price of 7.2p. At the time, it met the criteria I was looking for. If I’m honest, would it now? No. But as I’ve grown to understand the business a bit more, I’m happy to stay invested and follow their journey. Can I put this investment success down to skill? I don’t think so. Whilst it did meet my criteria at the time, it was a tiny company and felt very much a speculative investment. I certainly didn’t think it would perform as well as it has. I think I got lucky.
All the investing ability in the world means nothing if you don’t have the patience to see an investment through. I feel fortunate in that this isn’t something I struggle with. What I also realise is that this wasn’t always the case. I remember when I first had a reasonable amount to invest, I was sensible and picked large, dividend paying companies with a view to buying and holding for a long time. Think Vodafone, Glaxo, etc. Good yields, with good cover.
The problem is, I was logging on to check what was happening thirty times a day. Companies these large don’t tend to move very much, and so little was really happening. Nevertheless, there I was logging in regardless. So what has changed between then and now? I put it in part down to acknowledging how little I know about investing, and how that time spent fretting is better spent honing my craft and improving my knowledge.
Investing is Fun
I don’t mean fun in the ‘wahey, I can buy low and sell high, just call me Gordon Gekko’ sense of the word. But when I constantly hear how the most sensible option is to invest regularly into a diversified, low cost-ETF (or ETF basket) I instinctively recoil. I understand perfectly. Most fund managers under-perform in the long-run, and getting average market returns is actually something to be very happy about. But that would be to ignore a massive part of what I enjoy. Yes, making money is important. But so is the challenge. And it is a challenge. It tests you intellectually and emotionally. It tests your patience, your rationality, your fear. I want to try to beat the market, and I will devote all and any energy I have to doing so.
‘Gut Feeling’ Can Be Your Enemy
I’ve made stupid decisions because I ‘felt’ it was the right thing to do.
I bought Burberry at £13.78. I sold it a year later for £10.59 because I ‘felt’ they’d made a mistake with Christopher Bailey. Did I refer to my quantitative model in this decision? No. It’s at £22.60 today.
I bought Tristel for £1.18. I sold it a year later for £1.33 because I ‘felt’ growth had slowed a bit. Was it still a quality, profitable company? Sure. It’s at £2.71 today. At least I made money.
I bought Zytronic for £3.05. I sold it at the same time as Tristel for £3.60. Same reason. Same result. It’s at £5.10 today.
Had I stuck with the rationale I used to make these investments in the first place, my returns would have been better than they are. I let my gut unduly influence how I felt about these businesses and it has been to my detriment. So the lesson for me has to be this: If you invest quantitatively, you have to assess quantitatively. If you trade based on feeling, good luck to you. It’s not for me, but if it works for you, great.
More Lessons to Come
I have learned a lot over these three years. It’s an integral part of the investing journey, one you just have to hope isn’t too expensive for you. I’m still learning, bit by bit. Refining what I look for in a company, looking to gain a greater understanding of how it works. Each one is a living organism and should be treated as such. The biggest advantage I’ve found is in reading annual reports. A few year’s worth, if you can. I started doing this three years ago and it definitely marked a milestone in my progress.
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Creightons PLC is a constituent of the portfolio.