I have a confession to make. I spent seven years as a professional investor at a top tier fund. By several accounts I was pretty good, and I left at a senior position. My days were filled with analytical conversations and multi-page spreadsheets. But to be honest, when I first started on my FIRE journey, I actively disliked the idea of investing.
Don’t get me wrong. I liked the idea of my money making lots of money for me. I just disliked the whole idea of… you know, spending my time researching ideas, whether they be individual stock picks, selection of mutual funds, allocation of assets between stocks and bonds, and everything in between. I thought that I could avoid investing by doing something like starting a business and selling it for lots of money one day. Then I’d hire a private wealth manager who could deal with “all that other stuff.”
Life has a way of taking interesting turns. Here I am many years later, and I think researching investment ideas is pretty fascinating. I think that most people can fall in love with investing if approached the right way, or at the very least not view it as a torture reserved for the truly unfortunate. Let me walk you through my own change of perspective.
For purposes of this article, my examples are going to be about evaluating and investing in an individual company. However, you can generalize the ideas to any aspect of investment research, whether that’s picking a mutual fund to dump your money into, or deciding what percent of bonds you want to own.
Uninspiring Beginnings: A Common Mistake, or How To Doom Yourself to Failure
Early on in my journey to early retirement, I was made aware of how important it would be to “invest my money wisely.” Great, I thought. Let me figure out how to do that. So where did I go next?
Probably what most of you would also think to do. I went straight to the nearest book, a particularly hefty one that promised a comprehensive walk-through of all the investment options open to me, and I flipped to page one. A security is a fungible, negotiable financial instrument representing an ownership interest in…
Excuse me while I lay my head upon this desk and just – ZzzZ…
Think about your favorite hobbies. Maybe you’re super into golf, or designing video games, or gardening. Which of those hobbies did you start by reading a stack of textbooks?
Right. I didn’t think so.
Learning (and enjoying learning) requires two steps. There is the ingestion of new material. But there is also an important pause period in which you consolidate that information and actually apply it yourself so you can appreciate the benefits of what you learned. The pacing of new material matters a ton.
Reading a book back to front is like drinking from a firehose. Unpleasant, messy, and likely to leave you feeling a little queasy. That’s not to say no one can learn to love something from a book. It is simply that most books aren’t set up for ideal enjoyment. They are set up for ideal impartment of information, and that is only one half of the equation you care about. We’ll get back to this point in a bit. Suffice to say, this was my first shot at trying to learn investment. And my second. And my third. In fact, for about 5-6 years in high school and college I continued my hate-hate affair with the idea of investment.
The Turning Point: Your Most Inappropriate Questions…Answered!
My luck finally turned when I was 20. Faced with dozens of hours of free time distinctly not spent on studying for my college classes, I would surf the internet and occasionally comes across bite-sized, interesting stories about financial topics. I never clicked on titles like “7 retirement plan strategies.” But articles like “The $700 Million Company You’ve Never Heard of” or “How The Mortgage Industry Magicked Up $30 Billion of Value” certainly got my attention.
As I read these exposés of different businesses, a thought occurred to me:
Investing is great for nosy people. If you’ve ever wanted to ask socially inappropriate questions, investing is your safe haven. How much money do you make? Who are you most jealous of and what do they have that you don’t? What makes you think you’re so hot? These are all appropriate questions for an analyst to ask about a company they want to invest in.
I was only a year or two out of college when a friend sent me this article: this was back in the day when Groupon was just beginning its meteoric rise (and thus before its meteoric fall). It was a private company and this guy used a few scraping techniques to get super sensitive estimates of how the business was doing. How freakin’ cool.
I remember being so impressed by this. I thought about how this could be applied to public companies. Like a modern day detective, you could comb through financial statements and even material not provided by the company to figure out how things were going.
As someone who is very curious and likes to ask sensitive questions, this was a game-changer for me. If you were right, you would make a crap ton of money. So you mean people got paid to be nosy, kind of obsessive, and work in short bursts that didn’t require a marathon-like patience and attention span? Kind. Of. Awesome.
Takeoff: An Endless Parade of Ideas
I got incredibly excited about applying my new ‘investor mindset’ to real world ideas. I’d read an article praising some company and tell everyone around me how cool the investment idea was and why. I remember one of the things I was particularly excited about early on was Green Mountain Coffee. We used it in our office and I thought about how many freakin’ k-cups we were going through. So I did a bunch of research and put it on a phantom list of 2-4 companies I was tracking to see if I’d turn out to be “right.”
To be clear, I knew nothing about how to properly evaluate a company. But that didn’t matter. Everyone starts at the same place of complete ignorance. What was cool about running through a bunch of ideas is that it got me thinking about individual concepts in a way where I actually cared about them. I was going back to the books that had bored me to tears years earlier and finally reading the chapter on p/e ratios and stock splits with actual interest and a specific case study in mind. That made all the difference.
I also found that I learned more from the ideas that went sour than the ones that were raging successes. I started tracking Green Mountain in early 2010 when it was at $30/share. A year later it was at $80+/share. That made me feel like an investing God (spoiler: not actually an investing God). I learned little from the experience except for how to pat myself on the back.
By contrast, I was completely wrong on a call on Facebook, which caused me to devote hours to learning more investing concepts. When the company went public in 2012, I was convinced it was a good short candidate, meaning I thought you could make a lot of money betting against the company. Facebook generated almost all of its revenues from serving ads to its users. At the time it went public, mobile was becoming a huge part of internet behavior, and the thesis I had was that because there was so much less real estate on a mobile screen, Facebook would suffer if it couldn’t “figure out” mobile. Since I was convinced there was no actual way to “figure out” mobile, this made Facebook a rocket ship waiting to go down in flames. How do you add physical space for the same number of ads on a mobile device as you were able to serve on a computer monitor. Couldn’t be done. Give me my own hedge fund, please.
Boy, was I wrong.
Over the time tracking that bad call, I learned about how acquisitions which weren’t financially accretive immediately could actually play into a long-term business strategy (i.e. Facebook’s acquisition of Instagram in 2012). They innovated in all sorts of interesting ways – for example, I hadn’t taken into account that mobile ad inventory could be permanently priced higher per unit than its mobile counterpart because of higher engagement – I had assumed they would eventually compress to the same place. I also learned to read more of a company’s 10-k beyond just the headline financial statements. All of a sudden, the metrics they shared about ad fill rates, total ads serve, split between mobile and desktop, etc. took my focus. I learned a lot.
Most importantly, I learned with all the stops and starts that are present in any hobby or activity a person truly learns to love. You pick up scars and wins in equal number, and that gives it all the makings of a true hobby or passion. One that you look forward to working on.
Part Two: How To Ensure Your Success
“Expert Friends” And How To Learn Effectively
Be careful who you bring into the fold of your new project to learn about investment. Not everyone who is “active” is good, and most importantly not everyone who is good at investment is good at teaching or discussing it with someone at a different level. Nothing will crush your interest faster than talking to someone experienced who pokes a thousand holes into your argument 30 seconds into the conversation with all the gentleness of a charging rhino.
I’m not saying you don’t want to get critical feedback.
I’m saying you want to get metered feedback that balances momentum and learning for maximum growth.
Say your 8 year-old son wants to learn to play basketball. He gets out on the court, throws the ball, and misses his first shot. If you run out on the court, point out how far he was off the mark, and mention 30 things at the same time for him to think about such as feet positioning, arms, overhanded vs underhanded throwing, hand technique to create spin, etc. etc., do you think he’s going to want to try again? There are better odds he ends up in some therapist’s office 30 years down the road paying $175 a session to talk about how his Dad made him feel as small as a bug. As a beginner, you’re going to miss a thousand things. That comes with the territory. Your job is to make progress across the terrain quickly and enjoyably. We generally do that when we focus on one or two things.
Here’s an example. You read a neat article about how Facebook is the next big thing in tech. The stock’s soaring, analysts are cheering, and your friends are saying you should get in now and ride it to millions in wealth. After all, it’s growing 650% in Myanmar, Burma, Thailand, and Russia. Want to call your broker and put in an order?
You start pitching your idea to other friends and in investment forums. Someone brings up a question. “If their growth in these developing countries is the basis of your enthusiasm, how much revenue do you think they can even make from these countries?” Hmm. You hadn’t thought of that. All of a sudden, you think to yourself that maybe you should figure out how much ads go for in those countries, and how fast those rates have been growing over time. You find out they are 1/100th of the US and other developing countries. That means that if ad rates don’t increase quickly, Facebook has to serve 100 times more ads to get the same effect in Myanmar than in their saturated, mature markets. So how big is that opportunity really?
But then you hear something else: forget Burma and Thailand. The real excitement for Facebook is they’ve finally cracked mobile and that means they can double their addressable market in developed countries like the US…and the cycle continues.
This is how most people learn best. You focus on one or two things, chase them down, and have added a tool and a question to your arsenal after each sprint. Make sure the people you talk to pace their feedback in a fashion conducive to this.
Be deliberate about who becomes part of your learning experience. You don’t want to put yourself in an echo chamber where everyone agrees with you, but if you find yourself feeling like a piece of crap after talking shop with the same person multiple times in a row, chances are they aren’t a fantastic fit for developing your investment skills. Conversely, you should be concerned if you can’t find a single person who disagrees with your idea. You need to range farther afield, be it on internet forums or elsewhere to ensure you’re getting exposure to the kind of criticism that will help you grow. Keep nurturing your environment to maximize your growth and you will be rewarded.
Revisiting the Role of Books
I promised I’d come back to the topic of books on your learning journey. I maintain above that most books are optimized around imparting information, with less or little attention paid to the second half of the equation, which is to give the person time to consolidate the new information and apply those ideas. In short, books have a built-in pacing problem. Unless it can forcibly shake you by the shoulders and get you to put the book down after one chapter, you run a high risk of overwhelming yourself with too much information at once.
You can solve this by being deliberate about what you’re trying to get out of a book in every session. If you have an investment thesis for a particular idea, it will lend itself naturally to targeting your attention to one or two chapters at a time. Or say your question is about what allocation you should have in your portfolio of stocks and bonds. That will also guide you to a few specific areas for consideration rather than a 300-page marathon of 20 different concepts. A few of my favorite investment books are on this list.
What If I Actually Want To Read a Survey of the Land?
If you find you actually do like the idea of a surface-level primer on many topics at once, some books do in fact do a good job of it. You need to look for accessibility, though, and you need to be militant about it. The more it represents a textbook in tone and size, the less likely you are to enjoy it and build the momentum you need. A common mistake is to choose a comprehensive tome, thinking “once I finish this, I will be an expert!”
But you shouldn’t aim to be an expert after one book. Your metric for success should be that 1) you leave having learned at least or two new things and 2) that you come out more enthusiastic about the subject than you were entering it. If you keep #2 deliberately in mind, you will gravitate towards more accessible books. And that will serve you well, because you’ll actually be willing to read more. Slowly and steadily, you’ll find yourself building a truly valuable knowledge set.