This is a story I enjoyed writing not because it’s full of glamour but because it includes, what I will call my mistakes and/or what is typical of every human being who will care enough to admit it. I also enjoyed writing this story because it cut through the noise we make on Twitter and laid down my unabridged, concise and direct lessons.
I cannot recollect the exact time and period when I first became fascinated by the world of investing. However, I can tell that my interest in it is a very enduring one. It has stayed through many ups and downs.
As I wrote in this article, my first ever experience buying a stock was in 2017. I registered with a stockbroking firm and to purchase any stock, I will fill a form called a mandate, sign it and deliver it to my stockbroker to execute on the next trading date for them. I said “for them” because they don’t trade every day. Lol. I enjoyed the experience but it wasn’t long before the friction became unbearable and the subpar experience tiring. So I retired. I liquidated all my funds and just left it in a savings account.
In 2018, I was privileged to be introduced to a WhatsApp group where top finance professionals in Nigeria dominated. One of the frequent topics we usually discuss is how we can get the opportunity to invest in the foreign market seamlessly. So you can imagine the kind of joy that filled my heart when someone said “check out Trove” on one of those days when the conversation came up again. I checked it out immediately and a new story began. By the way that was in 2019. I wrote about Trove immediately.
I didn’t start using the platform until 2020 though. Yes, I can be that patient. I told myself none of such activity will start until January of 2020 and so was it.
Even though I wasn’t going to invest until 2020, I followed one company religiously; Stock A. I knew Stock A was a great company that a lot was ignoring because of temporary friction with deliveries and production. Stock A was redefining a new normal and I was determined that come January, that will be the first stock I will be buying. Did I buy it? Oh yes, I did. And I loved that I did.
I’ve told this story to a lot of people in the year. I bought Stock A when the price was $531 pre-stock split. Unfortunately for me, the following day after that, the price started going down. I couldn’t believe my eyes. Oh, I should mention that it was my first time having to execute a trade myself and watch it go up and down, remember I came from the world of feeling a mandate. The feeling wasn’t great at all seeing my hard-earned money “losing value” in my eyes. I couldn’t sell because that would utter stupidity. Bear in mind that this is a high conviction stock for me, having followed it for more than 6 months from the previous year.
It got to a point, I started praying for the stock to go up and I promised myself I will sell immediately once there is at least some gain. I wouldn’t deceive you, that was my story. That one experience though will go on to teach me some of the most important lessons that I will carry on forever on this journey.
Volatility is a feature, not a bug
I was naive and if I had learned this lesson before venturing into the game, I would have understood that stock prices don’t go up in perpetuity in the short term. They are volatile and Stock A even more. I will spend the rest of the year, reminding myself of this lesson. In fact, I capitalized on the volatility in the year, as I tend to buy more when there is a significant pullback and I have the cash to spear.
Great sleep at night is my target, not the highest return on the market
Truth be told, I will like to have a 1000% return on my investment in any given year. A friend put on his WhatsApp status that “in a bull market you have the choice between being right and making money” As much as that sounds great and to which I agree with it, I will like to add a third choice of “having a great sleep at night.” Where did the idea of great sleep at night come from? During the short period of holding Stock A, I checked my Trove app quite impulsively, every hour, I’m on it to see what’s going on with my investment. Poor me. I will later learn that “in the short term, the stock market is a voting machine and in the long term, it’s a weighing machine” – Warren Buffett. So I had to decide there and then that any stock that I cannot close my eyes on and have a good sleep will not make it into my holdings.
Know your game, play your game
This is in two parts:
One, if you are on Twitter like me, FinTwit is a very exciting place to be and a lot of advice and stories flying around. If you allow those stories to get to you, you are almost bound to continually make mistakes. Knowing your game and playing your game is a guiding mantra that you must follow.
Types of games:
- Some don’t know their game nor do they play it but come online to yab
- those that play a kind of game that is not suitable for you (won’t give you a good sleep at night)
- those that trade in stocks
- those that buy only Index Funds and nothing more
- those that only do stock picking.
Different people do different things in the market. You need to define why you are there and focus exclusively on that. Oh, I should not fail to mention another kind of game… some may have $100k in the market but that sum is not even up to 0.1% of their net worth so they can afford to gamble or play around with that sum. Yet, there are some that their whole life saving is $500. Those two are not logically meant to be playing the same game at all.
The other is divergent between being someone that manages someone’s money and you that manages your money. You are not playing the same game at all. You are worlds apart. While you can buy an asset that you believe to be of good quality and hold on to it for years, even if it doesn’t return excellently, the asset manager, on the other hand, has a threshold of return that he must have else, investors will pull their money away from him. You have the luxury of time and patience. Use it to your advantage.
Owing to this knowledge, the retail investor has no business with metrics like “stocks we are watching this week,” what metric would do a greater good is “stock we are watching for the decade because of this and this.” You may not find it readily available though.
The point of deliberately choosing your game and playing it cannot be emphasised enough at all. Yet, it’s a must you know it, else, you have no business being in the stock market at all.
It’s amazing what one failure can teach anyone if we took our time to reflect deeply on our steps, thought process and decision-making process. Let’s continue.
“Money decisions are made on the dining table, not on spreadsheets” Morgan Housel would say. I am a good definition of this and I admit it. This doesn’t mean I don’t do my research before taking actions, it just means I am human and I must always factor that in all my decisions. When I sold Stock A, it was simply because my emotions couldn’t handle the volatility anymore. Maybe if I had gone back to my “spreadsheet”, it would have calmed me down and helped me to make a more rational decision. But that’s why I’m human, given a path with both fear and opportunity and another with safety, my instinct will always choose safety. Take the time to understand your mind especially as it relates to investment, it will help you a lot and make you successful. This point was what the author of “What Works On Wall Street”, Jim O’Shaughnessy noted that made him conclude that the only sustainable edge left in the market is human behaviour arbitrage.
I sold Stock A with a 50% gain but Stock A did 700% YTD. I have no regrets. What I learnt from selling are invaluable nuggets that will carry me for decades while I remain not only in the market but in many more endeavours.
Some more lessons
Stock B! Another stock that taught me invaluable lessons. I bought, sold and bought again. But what was going on in my mind and why did I buy the same thing that I sold?
I must intimate you at this point the kind of game that I play in the market. To start with, the sum that I put in the market is close to 50% of my net worth. That said, my principle is to buy assets/companies that I can hold “forever”. Why? I don’t have the time nor the interest to research a company and then keep up with it forever to determine if it was time to sell or not. I don’t have that luxury of time or interest. So I do my research once and determine if I can hold this asset for long enough. Once I certify that I put a sum in it and watch it grow.
Same was for Stock B but more.
I saw Stock B dominating an industry that I referred to as “here to stay industry”. And Stock B was on its part to declare profitability until Covid-19 happened to them. So the price was falling way too quickly, I couldn’t take that considering I had bought the stock at an ATH (I usually don’t mind this since my holding time is forever). So I sold while it was falling to cut my losses. Beyond holding Stock B though, I was also interested in the business model. However, I noticed that the moment I sold, I wasn’t paying attention to them again. I didn’t like that, so I bought the stock again at a very low price. Little did I know that I was buying at the bottom.
As providence will have it, my position in it is almost returning 100% YTD.
What’s the lesson here?
- It won’t be great if you had seen Stock B in my portfolio and chose to buy without knowing why it was there. I had it because I loved the business. Yes, the company is trying to do all things great but the return does not justify the effort when I bought it. It might have been a different story as well.
- Even though my holding period is forever, it is occasionally wise to cut losses and move on. Peter Lynch said “people would say, it’s gone down this much already it can’t go any lower”, well history taught us, it can go a lot lower. Knowing when to pull out despite your thesis and especially when your thesis has been threatened is a needed skill.
This year was the first time for a whole lot of us in the [US] stock market and if the only lesson you can remember learning in the market is the 50% or 500% return on an individual stock you own, you have been doing it wrongly.
The most important lesson of the year
Probably the most important lesson I picked this past year was the importance of a managed fund or passive fund as a goal of achieving the ultimate investment goal of a great sleep at night. A Vanguard Total Stock Market (VTI) fund will be the perfect example of this.
While you will not have a 500% ROI in any given year, buying and holding it would mean you are making a bet on human ingenuity and quest for efficiency.
What does that mean?
VTI is an ETF that represents the whole US market and beyond the US market, it has some of the best companies around the world listed on it as well. The implication of that is that the companies in the fund have the best of the best around the world working daily to ensure the companies thrive. Well, so do we have mediocre companies in it. However, if history is any indication of which side thrives more over the other, then, we may conclude that the good companies are always great enough to cover up for bad companies.
What’s the implication?
It simply means you can buy the ETF and have a good sleep at night. You need not worry if the price is down today nor should you worry if it will be up tomorrow. You are betting that humans will continue to get better, optimize for efficiency and ease and your bet will pay off. We are humans, after all, we can’t settle for less.
While I’ve used a market fund in this example, other funds may help you fulfil such a quest for investment return under a philosophy of good sleep at night as well.
It was a one long year of ups and downs in the market. I am grateful for the early failures that took to heart enough for me to pay attention to what matters beyond the returns. A lot of investors who have grown in wisdom and wit have similar stories of early misjudgement to tell. In this, I find solace and welcome myself to their fold (lol).