Each and every investor goes through his/her share of ups and downs through their investing journey. Not all investment decisions are home-runs, and anyone claiming this is not sharing the complete truth with you. Even Warren Buffett, arguably the greatest investor of them all, has admitted to making investing mistakes. And since investing is not a science but rather an art, we should add some “buffer” (or sometimes called margin of safety) in our investment decisions should they don’t quite go as planned.
But lets assume we do all that and one of our decisions indeed does turn out to be wrong. What then? Simply move on? Nope! Like with all things in life, mistakes are an opportunity to learn from and investing is no different. So here are some of my learnings from my investing journey so far.
Stop trying to track stocks on a daily basis
This first learning may come as a surprise to the reader. Let me elaborate on this. Aside from the fact that I rarely have time to look at the stock market on a daily basis, I find the process itself is an incredible waste of time. This is because this starts a vicious cycle of reading up about why a specific stock is up or down by a certain percentage. Most of the times, this reading is not very rewarding and only manages to feed into my biases (more on this in a separate learning below).
Ultimately, this whole process feeds will lead me to want to “do something” with my existing position. This might result in either a needless buy or worse, a needless sell.
This follows the first learning closely. It is incredibly easy to get swayed by news headlines on < insert your favorite financial news medium here>. Generally, the news broadcasters will tend to exaggerate these headlines for their vested interests. I try my best to avoid reading such articles and instead follow the news directly from the company’s press-releases, earnings reports etc. This helps me form my own opinion.
In the off-chance where I do read these headlines, I try to look past the headline itself and see how this news impacts my long-term view of holding this stock. Is this going to impact the company say 5, 10, 15 years from now? If the answer is no, then I move on other things. If the answer is yes, I will consider researching it some more.
It is important to understand though that “financial news” has the same debilitating effect as stock ticker tracking…it has a tendency of feeding your biases. In general, my sense is that the news is geared towards investors who are short-term focused, which is diametrically opposite to my long-term investing philosophy.
Convince yourself first
Sometimes investing can feel like a battle within yourself, where one half of your brain thinks a particular stock is worth buying or selling, and the other half is not convinced. One half thinks analytically, the other half relies on qualitative analysis. Neither half is more or less important than the other, they both have their place in the mental makeup of a successful investor.
But it is important that you don’t let either half be swayed by what someone else thinks of a particular stock and have them make that decision for you. For this reason, I try and make my own opinion from my own deep-analysis/research of my position. This helps me convince myself that the buck I am spending to purchase a stock is indeed well-spent.
One of the things that frustrated me as a beginner investor is getting standard advice from seasoned investors which goes along the lines: You have got to do your due diligence when investing. But it was not exactly clear what does “due diligence” really mean. At what point do I say: yes, I have researched everything there is to research about this company and I am ready to buy or not buy. I immediately realized that exhausting the research space for any given business is a futile exercise. The challenge being that you do not know what you do not know.
Instead, I have now begun to adopt an approach where I will initiate a position in a company if the initial research supports that decision and use the new information available (through press releases, financial statements, interviews with the company executives etc.) to further build my understanding of the business. Each new position will then be “promoted” to a new category depending on how confident I am regarding the business.
This may sound like a no-brainer now, but it was an important lesson in my education as an investor.
Waiting for a stock to reach your target price
This is a fairly controversial opinion. So I want to give some backdrop here before I state my position.
In my opinion, dividend growth investing and value investing are tied to each other at the hip. Every dividend growth investor is also a value investor in some sense. Why? Dividend growth investors are focused on improving their portfolio’s overall yield-on-cost. And to ensure that, they will need to ensure that what they are buying is reasonably priced. Another way to state this: Yes, you are building a passive income stream for yourself through dividend growth investing, but what exactly are you paying for that passive income stream? Is that a reasonable cost?
This is why determining the intrinsic value/fair value of a business is crucial. And there are several valuation techniques available for this estimation.
So say you did all that, you determined a fair value of a business, added in a margin-of-safety and then wait for the stock price to reach your desired buy price. But what if this wait is decades long. Is this the right approach then?
Or are you suffering from anchoring bias, where your brain is transfixed on your target buy price?
I have struggled with this myself and I have determined that for a business that I am confident is extremely high-quality, sometimes it is okay to be paying to premium to have it in your portfolio. This followed by consistent dollar-cost averaging into a position is probably a better approach then waiting for the stock to reach your target price.
And when the stock price does indeed reach your updated target buy price, you double-down, buy more and add aggressively to your position.
In my mind, this approach makes more sense and seems to be working better for me. But time will tell if this was a mistake.
Learning is a continual process and I hope that remains true for me even as an investor. I hope to follow-up on these learnings in a future post.
Let me know what you think. Do you agree? do you disagree? do you have some other thoughts? I would really love to hear from you.