Every now and then I like to do a review of what I think my 5 biggest market lessons have been.
The interesting thing about markets is one or two of these can change as the context changes.
Back when I was younger, I’d have had a different perspective (which I’ll highlight in this email) on the lessons I’d learnt.
But over the last few years, my view on certain aspects has changed, and I think it’s important you take these lessons onboard (and make them your own too).
The most important, and most consistent lesson is right at the end though, taught to me by a short term mentor called Rob Newman MANY years ago now.
He worked at a firm called Market Securities on their FX desk…
From what I recall of him now, he was a very centred, calm and knowledgeable old school trader type…
And when I was on the floor of Market Securities for a mini internship, I recall one of his colleagues saying to me ‘you ain’t got a fucking scooby do ya?’ when I was looking at one of the screens showing a vol surface of an FX option.
Rob laughed, not in a mean way, more in a ‘he does have a scooby, he’s just fresh faced’ way.
Just the way things were back then, you took the little jibes rather than get upset (probably a lesson in there itself).
Lesson one is the efficacy of being a macro focused investor is piss poor.
Lots of super smart people obsess about macro.
And it makes sense to some degree - the sell side (banks and research houses) want to craft stories to drive flow.
But at the end of the day, all they are doing is making a neighbouring bet on one of four things…
Momentum, size, quality or value.
That’s it.
And they are doing this via the expectations of where interest rates will go.
If interest rates go up, it’s likely momentum will suffer for a bit, as will value…
So perhaps quality as a factor will reign (big firms with good balance sheets can weather the storm of higher debt costs for instance).
But these firms dress all this up in something with so many variables it’s hard to judge which will have the biggest effect.
So they just make a big story out of it with 16464 charts and just a vague bet that some weird combination of bond option trades and a volatility structure will work best.
Rather than just providing an idea on which asset will go up.
It’s a play on satisfying some investors’ feelings of needing to be super smart.
You don’t need to be super smart in markets; you just need to understand risk and asymmetry.
Lesson two is that diversification is for when you’re already rich.
I saw a comment the other day on X that said (and I am paraphrasing) ‘yeah Druckenmiller preaches concentration, but he holds about 50 stocks!’ (view his portfolio here)
I don’t think the person saying this realised the value of what Druckenmiller was saying.
He is doing you, the DIY investor, a big favour!
He is telling you the blueprint to getting to where he is.
Be concentrated.
Be smart about your concentration.
And do not be overly diversified until you are able to earn your number in dividends per year.
For the DIY investor, aggressive capital growth should be the goal, with an easing off when you get older.
If you haven’t watched our free webinar yet, check it out to get an idea of how you can get concentrated thematically.
And this is the same for any big investor to be honest…
You aren’t going to get anywhere fast chucking cash into ETFs, and believe me, you are more capable than you think to take single stock risk.
The horror stories are from those who use leverage and don’t have an understanding of market drivers… which is a lot of people.
Lesson three is the market doesn’t give a shit about you.
We did a group call with our Fink Platinum guys the other day and it was all about feelings.
Sounds like therapy right?
But the whole point of it was that things that might have occurred a long time ago in your life leads to feelings of inadequacy or incompetence now when the market punishes you by a position not going the right way, or having to close out for a loss, or even closing in profit but then seeling the market go even higher in the months following.
Got this message from one of the gents on the call afterwards.
Lots of gurus will tell you that you have to control your emotions and all this shite.
No, we just think you have to understand them.
You’re not a robot, you can’t stop yourself from feeling (if you can then you need psychiatric evaluation for a personality disorder) - you simply need to feel them and understand where they’re coming from.
Don’t ignore the feeling of inadequacy if you make a ‘mistake’ because the market is not punishing you specifically, and this is a major problem for many.
The way to overcome this is to control everything you physically can… which is literally just risk management (and some nifty ways of creating good investing ideas of course) and is why we focus so heavily on volatility and objective based risk management in the Academy rather than simply ‘shove your stop loss 2% away from market (an idea conceived by the educationally incapable and mentally deranged)’.
Just remember - don’t pat yourself on the back too much for a good trade but don’t punish yourself too much either for a bad one because the market doesn’t care about you either way.
Lesson four is to work backwards.
This is actually the Charlie Munger method a little.
Think about the future first.
Then think about the biggest risks to that future.
What we tend to do when thinking thematically (again, watch the webinar to get a complete understanding) is to think about what the world will look like in 3-5 years.
Then work backwards to find the firms who are most likely to satisfy that world view.
But including the Charlie method, then focus on the biggest risks to that view.
If the risks outweigh the benefits, or the company selection outweighs the benefits, it's a high risk trade.
If they don’t, it’s a good one.
Of course, this is hard to do, but it keeps you on point.
One of the reasons why we like Ouster so much is because of this method.
Yes, it’s a small cap right now but the TAM, rate at which they’re likely to commercialise and the protection they have got from a regulatory perspective (alongside the theme) makes them a strong firm for the world in which we think we will be living in in 5 years time.
We’ve gone through the risks and they certainly do not outweigh the potential benefits to the growth of the share price (dilution is the biggest risk but even at that, this is not strong enough to provide sufficient downside to our view since the biggest companies in the world have diluted heavily at some points in time).
Focus more on working backward to keep your decisions in the present more grounded.
Lesson five is the big one.
This is the one taught to me by Rob.
And it’s simple.
Always have a view.
I’ve said this one in so many emails before I think I might be sick at the repetition, but it’s so important.
Even if your view is ‘I only buy things that are going up’ or ‘I think X sector will outperform’ or anything else…
Have a view that you are willing to stand by and be willing to change.
Because by having this view and being malleable with it too, you’re able to confirm or deny information that comes your way.
Without having a view, you’re flying blind.
And don’t get me wrong, there are some views that are plain wrong (like the US is going to implode because of debt or that there is always a bubble going on or anything else that is plain ridiculous and said by people who have simply missed out on the rally)…
But we can work with fixing that 😉
Just please, have a view that isn’t simply ‘I am buying the SP500 ETF only.’
That just tells me you don’t have enough information, decision making skills and understanding of how to manage a portfolio…
Yet.
PS. After watching the webinar above or even just reading this email, if it makes sense, book a call with us to discuss how we might be able to help you reach your investing goals. I am sure there are some simple tips we can give on the call to help you out that you can action right away.
We tend to cater to business owners and professionals but really anyone can be helped so please do reach out.