Lessons

Lessons Learned from Three Years of Investing

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.

Understanding Metrics

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.

Luck

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.

Patience

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.

Happy investing!

Find me on Twitter @BritishInvestor, or leave a comment below.

Creightons PLC is a constituent of the portfolio.

8 thoughts on “Lessons Learned from Three Years of Investing”

  1. Hi TBI, that’s a good list of timeless lessons, especially the bit about reading annual reports and going (primarily) by the numbers. Too many people invest based on a few news articles and a company’s dividend yield or PE ratio.

    Good luck for the next three years!

    John

  2. Hi

    Thank you for your posts. I find them interesting and informative and to some extent your experience parallels my own though with different stocks, we have two or three common holdings.

    The impatience thing chimes with me a lot. Impatience got the better of me with Apple, Amazon, DTG, RACE, RR to name a few. I think I am learning though DTG a recent (08/17) (huge) mistake.

    I also started seriously about 3 to 4 years ago but for different reasons, all my money was tied up until then propping up my business (now sold and I am now full time investor/health nut/having fun!) coming out of the financial crisis.

    I have a blog but rarely updated in the past and I am not going to spam it here and the gains for the past year I have been more than happy with though this year has been trying.

    Anyway thanks again.

    KR
    Michael

    1. Thanks for commenting, Michael.

      It appears to me as if the biggest returns come from holding through long periods of time. It’s easy to use as an example but had you held Amazon at its IPO you’d have had to sit through a number of massive drawdowns on the journey to the current share price. That’s where belief and understanding of a company’s prospects come into play. Investing based solely on price is a big mistake.

      Thanks again. Do let me know if you start your blog up again. Always good to share.

      Chriss

  3. Hi TBI,
    Thanks for this post, I am retired and spend a lot of my day checking out my investments. Agree with all you have said and will forward these points to our younger family new investors, who can’t quite decide whether to “risk” investing for their futures. GL for next 3 years.
    Maggie.

    1. Hi Maggie

      Thank you for taking the time to comment. I hope the post will be of use to you and your family. Best of luck to you too.

      Chriss

  4. Great article Chriss. Big fan of your blog (easily one of the best UK investment blogs). I too am a private investor. Biggest lesson for me over the past 2 years has without question been the importance of patience. Thanks for sharing and all the best for the rest of your investing journey! CJ

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