Thursday, December 1, 2016

The Maturation of an Investor


Many of us have had early success in investing. My first microcap investment fifteen years ago was a 15-bagger. Instant success can be a great imposter because you think it’s skill instead of luck. Your head starts to swell. After this first big win I thought to myself, “Warren Buffett who? Investing a marathon? Pfff..This is going to be a race and they better get a spot ready for me on the Forbes 400 list”. Here is a chart I shared in a previous post on my maturation as an investor:

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We all want fame and fortune, but the problem with instant success is you rarely have the power to keep what you haven’t earnedIf you don’t have a firm foundation and understanding on how and why you received something, it’s really hard to keep it let alone duplicate it. Deep down we all know it’s not what we do randomly that will produce long-term returns; it’s what we do consistentlySo the education begins to try to turn random luck into consistent skill

Unfortunately, investing’s greatest lessons can’t be taught in a book or in a classroom. They have to be experienced and often times the teacher is loss. Don’t get me wrong, you can learn a lot from books and from other people’s experiences, but they are no substitute for making your own experiences. 95% of successful investing is controlling your emotions when your money is on the line. This is why paper trading/investing is almost useless. You have to put your own money on the line.

In most cases to step toward your destiny you have to first step away from your security. You have to risk who you are for what you can be.

The market loves to destroy egos because only through humility can it prepare your mind to accept truth. Just like military training, the market needs to tear you down and destroy all your selfish beliefs and tendencies before it can build you back up. It is no accident that the greatest lessons occur when we are the most confident. My biggest losses have all occurred after my biggest wins. During periods of over-confidence is when we decide to get lax with our checklist, analysis, maintenance due diligence, or expand outside our circle of competence into areas we don’t have competence. This is when the market comes in and destroys our ego again. It is not surprising that many successful investors are not arrogant or brash, but self-reserved and humble.

“Wisdom flows into the humble man like water flows into a depression”

An investor must experience the highs of success and lows of failure several times before they can exploit these emotions in others. Through the peaks and valleys of your investing experience you begin to learn and pick up nuggets of truth that begin to shape your investment philosophy. In a recent article, When To SellI shared a bit on how my own personal investment philosophy shifted from short(er) term trading to longer term investing.

I’d like to share with you another story:

In 2008, during the financial crisis, I was well diversified (sarcasm), invested in primarily two companies of equal proportion. The first company was a junior mining company. During the crisis, the stock was down 70% from its highs a year earlier. I held on. I knew the management and company really well. It was a high quality junior mining company, if there ever was such a thing. The stock recovered all its losses before the market bottomed in early 2009, and 18 months later was up 600% more.

The second company was a consumer products company. I had traveled to meet management and did field based research. The company’s products were sold online and in large retailers. Even during the worst economic backdrop since the great depression, consumers bought the product. During Q1-Q4 2008, Revenues were up 200%, 200%, 450%, 320%, compared to Q1-Q4 2007. The company produced record results during the crisis. Since no one else owned the stock it only had one way to go…Up…300% during the crisis while the broader markets were down 50%.

I’m not naïve enough to think the success I had navigating the financial crisis of 2008-09 was all skill. You will become a better investor when you accept the role that luck plays (good and bad) in your winners and losers. The mining company literally outperformed all other mining companies in North America for a 5-year period. The consumer company was one of only a handful of companies that doubled or more during the crisis. These two companies were probably in the top 0.1% of all companies during this time period. I just happened to find them (one randomly at a conference, second one through word of mouth), did the work, bought them early, and had the conviction to hold. When the next bear market comes, whenever that may be, it would be hard to duplicate this success.

Nevertheless, I learned a great deal from this experience which ultimately gave me the confidence to become a full time private investor. A few years prior I learned the importance of knowing my positions better than most, and this nugget helped me greatly during the crisis. Owning these two companies during the crisis taught me two more valuable lessons. First, invest in quality because quality always pays you back first. Even before the bottom was put in the bear market, capital started flowing back to quality first. This is something I always remember to this day. Second, invest in the best companies you can find that no one else owns because these companies can do well in any market environment. What does “No one else owns” mean. For me it means zero or very limited institutional ownership.

We as human beings are very impatient, so the hardest part of maturing as an investor is allowing ourselves the time. You can’t force it. Many investors “force it” by being active for activity’s sake. I believe it was Ed Borgato that said, “I find that a lot of what Wall Street perceives as productive activity is needless complexity”. Just like a fine wine, you have to be patient and allow yourself the time to mature. Pastor T.D. Jakes in his book, Destiny, says it best, Many people cannot find success because they lack the patience to go through the process to become who they want to be.”

You cannot force the maturity process but you can shorten it in five ways:
1.      Experience. Don’t be afraid “to do” and learn from experience.
2.      Read. Read a lot of annual reports and industry reports. The key is to develop a circle of competence so you can act quickly and decisively. Read up on business leaders, investing leaders, thought leaders, and even some fiction. Why Fiction? It keeps your creative mind balanced which ultimately makes you more focused.
3.      MentorsPicture in your mind where you want to be in 10-years, and then go find that person today and learn from them.
4.      Self-Awareness. In this context self-awareness is the ability to identify and evaluate your strengths, deficiencies, and outcomes. For example, you need to have the self-awareness to recognize luck versus skill. Sometimes you will make the right decision but you will still lose money. This doesn’t mean you made the wrong decision. Sometimes you will make a wrong decision but you will still make money. Don’t play games with yourself. Have enough self-awareness to recognize that even though you made money your actions were wrong.
5.      Own Your Mistakes. When you blame others for your investing mistakes it proves you didn’t do enough of your own work. Fully own your past mistakes so you learn from them.

Only after you’ve experienced failure can you fully appreciate success. You aren’t defined by your past. You are prepared by it. A big part of the preparation is so you develop a thick skin. True conviction can only be obtained by trusting your own research over that of others. Most multi-baggers will have long periods of stagnation as fundamentals backfill, old shareholders give up or get bored, and new shareholders enter. A multi-baggers journey is filled with the corpses of highly intelligent articulate naysayers. Every investors strategy is different, so don’t waste a lot of time defending your positions to others. Do the work. Trust your work. Let company execution prove you right or wrong.

I’d like to leave you with this. You weren’t put on this Earth to be average so stop thinking like everyone else. The greatest investors ever, they all had different investing strategies. Some of them strikingly different. The commonality amongst all of them is they focused on the downside. Find an area of investing that connects with you and your personality. You will have some painful lessons as you mature as an investor, but it’s all part of the journey. Almost all successful people went through incredible hardship, obstacles, and challenges. The power to endure is the winner’s quality.

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