10 Crucial Investing Lessons from a Decade of Experience

After more than a decade of investing experience, I've learned some valuable lessons that have shaped my approach to the markets. Here are 10 key insights I've gained:

1. Be Careful Who You Listen To

It's natural to compare ourselves to other investors, but it's crucial to focus on your own goals and strategy. Look for investors who have a similar approach and time horizon as you. Be specific about what "inactive" or "long-term" means to you, as these terms can vary widely between investors.

Pay attention to track records, but understand the context. A 10% CAGR investor may actually be more skilled than a 15% CAGR investor depending on market conditions and strategy. Focus on audited, public track records when possible.

Remember that even great investors can be wrong often. Use others' insights as one input, not gospel.

2. Don't Screen for Stocks

When I started investing, I thought it was purely a numbers game. I relied heavily on stock screeners looking at metrics like P/E ratios and debt levels. However, this often led me to low quality businesses outside my circle of competence.

Now, I prefer to look at the portfolios of investors I respect as a starting point. I try to reverse engineer their process and only consider stocks within my areas of expertise. This has led to much better results.

3. Your Circle of Competence is Smaller Than You Think

I used to believe I could become an expert in any industry if I just studied it enough. Over time, I've realized my circle of competence is actually quite narrow and focused.

My portfolio is concentrated in just a few areas where I have deep expertise - capital allocation, advertising/media, and gambling. I've found I need thousands of hours of experience in an industry to truly understand it well enough to invest successfully.

Don't overestimate your abilities. Focus on your true areas of expertise and be honest about what you don't know.

4. Read Investing Books, But Study Real Businesses

Investing books can provide a great foundation, but there are diminishing returns after a certain point. I've found studying actual businesses through annual reports and other primary sources to be far more valuable.

Reading 10-Ks of companies you find fascinating, even if you don't plan to invest, can teach you more than most investing books. Business biographies and case studies are also great for understanding how real companies operate.

Don't just read about investing theory - study the actual businesses you may want to own.

5. Set Up Guardrails for Yourself

We are all prone to behavioral biases and mistakes. Setting up rules and systems to protect yourself from your own worst tendencies is crucial.

For example, I invest through a fund that can only be redeemed once per year. This forces me to be inactive and avoid overtrading. I also limit myself to 10% position sizes at cost to ensure adequate diversification.

Understand your own psychological quirks and set up guardrails that work for your personality and goals.

6. Don't Look at Your Track Record Too Often

Constantly checking your performance can lead to short-term thinking and poor decisions. I went over a decade without formally calculating my returns.

While that's probably too extreme, I now aim to only look at my track record once per year at most. This allows me to stay focused on the long-term without getting caught up in short-term fluctuations.

Find the right balance between monitoring performance and avoiding obsession over short-term results.

7. Don't Only Have Public Equities in Your Portfolio

When I started, I thought stocks were the only asset class I needed. Studying financial history showed me the dangers of having all your wealth in one country's stock market.

Now I keep about 60% of my liquid assets in public equities. I still love stocks as an asset class, but diversifying across asset classes and geographies provides important protection.

Don't put all your eggs in one basket, even if that basket is the stock market.

8. Run Your Track Record 1,000 Times

It's easy to judge investment decisions based solely on outcomes. But a good process can sometimes lead to poor results in the short-term.

I try to imagine running my investment strategy 1,000 times in parallel universes. Would it work more often than not? This mental model helps me focus on process over outcomes.

It also reminds me to stay humble. Even if I've had good results, luck likely played a significant role. Focusing on having a sound process that would work across many scenarios keeps me grounded.

9. Position Sizing is Critical

My approach to position sizing has evolved significantly over the years. Now I use a three-tiered system:

1% positions: Stocks I've researched but am still getting comfortable with. Allows me to follow closely without too much risk.

1-10% positions: Companies I have high conviction in trading at attractive valuations. I size up to 10% based on conviction and opportunity cost.

10%+ positions: I let winners run above 10% but won't add more capital at that point. Allows me to benefit from my best ideas without overly concentrating.

Find a position sizing approach that fits your risk tolerance and helps you sleep at night.

10. Understand the Implicit Assumptions in Advice

When getting investing advice, always consider the source and their circumstances. Someone managing billions will have very different constraints than an individual investor.

Everyone's situation is unique in terms of goals, risk tolerance, time horizon, and expertise. What works for one investor may be completely wrong for another.

Take all advice with a grain of salt and adapt it to your own circumstances. There is rarely universal investing wisdom that applies to everyone.

Conclusion

Investing is a lifelong journey of learning and self-improvement. These lessons have served me well, but I'm sure I'll continue to evolve my approach over time. The key is to find an investing style that fits your personality and goals, then stick with it through market cycles.

Remember that no one has all the answers. Stay humble, focus on continuously expanding your knowledge, and learn from both successes and failures. With the right process and mindset, investing can be incredibly rewarding both financially and intellectually.

Article created from: https://www.youtube.com/watch?v=7sSPzRpvLzM