10 important lessons learned during more than 20 years in #investment management.
A 🧵 to help you become a better #investor in #stocks.
A 🧵 to help you become a better #investor in #stocks.
I started to invest my own money in stocks in 1999 and made my first $100k a year later, massively profiting from the DotCom boom.
As we all know, the DotCom bubble burst and I lost half of my wealth in less than a year. Ouch!!!
As we all know, the DotCom bubble burst and I lost half of my wealth in less than a year. Ouch!!!
This unpleasant early experience shaped my thinking about how financial markets work.
It also made me realize that a systematic, data-driven approach is the most promising way to invest.
The following 10 lessons learned are based on this idea of systematic investing. Enjoy!
It also made me realize that a systematic, data-driven approach is the most promising way to invest.
The following 10 lessons learned are based on this idea of systematic investing. Enjoy!
1) In the beginning, your savings rate is all that matters. Try to invest as much as possible. Dollar cost averaging has the most positive impact in the early stage of your journey.
Over time your investment returns become dominant & large drawdowns really start to hurt.
Over time your investment returns become dominant & large drawdowns really start to hurt.
2) You can either ignore drawdowns and sit them out (2nd best option) or try to time the market with a technical model (best option).
For me, the combination of a medium-term (40-50 days) and a longer-term (150-200 days) moving average of the S&P500 or MSCI World worked well.
For me, the combination of a medium-term (40-50 days) and a longer-term (150-200 days) moving average of the S&P500 or MSCI World worked well.
Simple rule: reduce stocks if the 40d crosses below the 150d SMA. Increase stocks if the 40d crosses above the 150d SMA.
This doesn't always work, but it puts you into all major trends. Would have worked well over the past 100 years, even during the great depression.
This doesn't always work, but it puts you into all major trends. Would have worked well over the past 100 years, even during the great depression.
3) As a well-diversified basis for your portfolio, buy an ETF or a good mutual fund on a broad index like the S&P 500 or the MSCI World.
Add high-quality single stocks from different sectors if you enjoy from and have some experience in stock picking.
Add high-quality single stocks from different sectors if you enjoy from and have some experience in stock picking.
4) Look at a stock from different angles: Chart in uptrend? Valuation ok? Growth ok? Defensive balance sheet? High ROIC? Strong underlying business? Rising EPS?
The more boxes you tick, the higher the probability of success. I'll write a separate thread on stock selection...
The more boxes you tick, the higher the probability of success. I'll write a separate thread on stock selection...
5) Accept uncertainty. Investing is all about taking high-probability opportunities & managing risks. You'll never be right 100% of the time (a win ratio of 50-60% is normal). As long as you make more on winners than you lose on trades going south you make money.
6) To improve asymmetry you shouldn't tolerate large losses. If an investment doesn't play out in reasonable time >> EXIT! Define a stop level (e.g. -15%) and sell if the stock falls below.
Another option is a time stop. Sell if a stock doesn't move within a defined time frame.
Another option is a time stop. Sell if a stock doesn't move within a defined time frame.
7) Avoid hyped stocks everyone speaks about. Chances are high that those will underperform in the future.
Valuation matters. Paying more than 50 times earnings for a stock only makes sense if EPS growth over the next 3-5 years is >40...50% p.a., which is very rare.
Valuation matters. Paying more than 50 times earnings for a stock only makes sense if EPS growth over the next 3-5 years is >40...50% p.a., which is very rare.
8) Always invest in high quality. Avoid leverage, penny stocks, NFTs, meme stocks, weak balance sheets, low margins, and investments in a downtrend.
You would probably never buy an ugly house in a shitty neighborhood. The same applies to all of your investments.
You would probably never buy an ugly house in a shitty neighborhood. The same applies to all of your investments.
9) Try to control your emotions. Be careful if everyone is euphoric. Add positions if the world looks dire.
Don't listen to so-called "experts", as no one has a crystal ball, and some may have their own agenda. Instead, think long-term and avoid the daily dose of market noise.
Don't listen to so-called "experts", as no one has a crystal ball, and some may have their own agenda. Instead, think long-term and avoid the daily dose of market noise.
10) There is no way to get rich quickly. Day trading, FX, penny stocks, or other schemes are designed to fill the pockets of those offering them. The probability of success is 0%.
The probability of success when investing in the long term is 100%. Getting rich slow is key.
The probability of success when investing in the long term is 100%. Getting rich slow is key.
Summary: Investing is a serious business and not a game. It is a marathon and not a sprint. It requires dedication, commitment, and some effort.
If you don't have the time, consider engaging a trusted wealth manager for this important task.
If you don't have the time, consider engaging a trusted wealth manager for this important task.
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