Ten Things to Consider Before You Make Investing Decisions
Great challenge @chantelle . I'm going to try and make a stab at it.
1. Why am I granted this amazing "edge"?
There's a billion people interested in investing. They are all looking for an opportunity to buy low and sell high (the essence of every single investment) .
Why am I the one person who sees this opportunity unlike everyone else on the planet?
One time, a guy wanted me to invest in his company. He told me, "once this round closes george soros is going to invest."
This is bullshit. Why wouldn't George Soros invest at the cheaper price? Is George Soros waiting by the phone to find out if James Altucher is investing?
It's very hard to have an edge.
2. If the investment is a company, has the CEO done it before?
One time I invested in an online ticketing company called TicketFly.
What I liked is that:
- the CEO had sold a ticketing company before (to ticketmaster)
- he knew ways to improve his. old company (add social media to the ticketing process)
- he knew his old customers and was able to call all of them
- he knew how to handle the process of selling a company.
They sold for $400mm a few years later.
3. Are there people smarter than me in the investment?
I am not that smart. And I am not saying this facetiously. With investing, to get an edge takes a lot of work and intelligence.
So I like to invest in situations where people are either a lot smarter than me or have a lot of industry knowledge since I have industry knowledge over approximately zero industries.
For instance, Buddy Media was one of my first angel investments in September, 2007.
They were a Facebook marketing agency. I didn't know. but then I found out Peter Thiel, who was the first investor in Facebook, was investing. He's smarter than me. So I invested.
They sold to salesforce.com in 2012.
4. I shouldn't be the only investor
This is a direct corrolarry of the above but I still want to repeat it. Every time I thought I knew what I was doing and wanted to invest, I lost money. So this idea is really a reminder: "Idea #3 is key." This applies to investing in private companies.
5. Does Idea #3 apply to public companies (stocks)?
Yes. Whenever a large investor buys more than 5% or a public company, he or she has to file a 13G or 13D filing. And once a quarter, all large investors have to file 13F fiiings detailing ALL of their holdings.
Studies have shown that simply buying the stocks Warren Buffett buys will give you an above average return. Now, Buffett is so big I wouldn't follow Buffett. But pick a set of investors and see if you can buy stocks they buy at a discount to where they bought.
As an example, when Elon Musk filed his 13G on Twitter, that was a decent buy if you bought that second. There are alert services for 13Gs and 13Ds
6. What about Real Estate?
All of the same principles apply but most important is: why do I have an edge?
I recently bought some real estate in Georgia. The reason I was looking there was because:
A) Change-of-address data from the post office in NYC showed that people were moving to Georgia, Miami, Dallas, Nashville, NC, etc. I looked at all those places and looked for where real estate hadn't started moving yet.
B) I looked up what major tech companies were setting up offices in Atlanta.
C) Try to look for one of the 4Ds:
1) Death - if someone died and the family needs to sell the house for taxes, it could be a fast deal at a cheap price. Death data is of course available, as is data on the other Ds below.
2) Divorce - if a couple divorces they want to get the house cashed out and split as fast as possible. THis could create an edge
3) Disease - simialr to death
4) Debt - look for tax liens on the house. They might need to sell fast.
These sorts of things will give you an edge.
Don't try to guess about which parts of the country will make it in the long run. That's what everyone is doing and you won't have an edge.
7. Go the room least crowded.
If a company is on the front page of the Wall St Journal, you don't have an edge.
Sure you might say, "I love the Tesla car so I will buy TSLA stock." And then you might get lucky. Don't forget that that is luck.
In general microcaps return more than large companies because microcaps aren't publicized as much so fewer people know about them. Also, big hedge funds can't buy them because they are too small, so you have less competition for information.
And then you need to figure out, still, why the information you have is giving you an edge.
8. It's a cliche to say "buy when there is blood in the streets."
Everybody says this, few do this. How come?
because when the market is down people are afraid and it can quite easily go down further. You have to have strong committment and believes about the market to hold on. Because most likely when it's cheap, you are correct to buy, but it WILL GET CHEAPER.
That said, in times like 2002, 2009, and even March, 2020, look for weird things.
In 2002, I invested in a basket of companies that were tiny, were profitable, and had more cash in the bank (and no debt) than the company was worth on the stock market. Buying the whole basket was lucrative.
In 2009, there were several companies (called closed end funds) that only held municipal bonds. I reseerched and found that the only way these bonds wouldn't be repaid is if the entire world fell apart and then some. Like nuclear attack.
But the funds had sold off so much that they were yielding 30%+ dividends. This is weird and was a good way to buy the market when I thought it was too cheap.
In 2020, there was a day or two when oil was priced at negative. That technically means someone would pay you to take their oil. This is ridiculous.
@RA Robyn bought a bunch of oil companies and USO, the ETF for oil and she quickly make a lot of money.
That said, as John Maynard Keynes has stated, the market can remain irrational longer than you can remain solvent. So only invest money you are willing to lose when things get ridiculous. Or pay attention to to the next idea.
9. Reduce risk
The key to all of the above ideas is not about making money. It's about not losing money.
We all know investing is a path to wealth. But the key to that wealth is to make sure you stay in the game long enough. The key to winning the game is staying in the game.
You stay in the game by spending 5% of your time finding the right investment and 95% of your time reducing risks.
Did you do your research?
Is the market big?
Is the investing market behaving irrationally?
Are their people smarter than me investing in this?
Are there other ways I can reduce risk?
Reduce risk reduce risk reduce risk.
Always ask, "Why am I getting this amazing opportunity?" Who am I to get this.
Is the investment too crowded? Am I just lucky that I found this? (and if answer is "yes" then DO NOT INVEST because there is no luck on good investments).
10. Two Warren Buffett quotes.
I wrote a book on Warren Buffett. "Trade LIke Warren Buffett". Someone told me back then it was one of his favorite books about himself.
"There are two rules to investing: 1. don't lose money. 2. don't forget rule #1".
Quote #2: "If a company looks like it will be here 20 years from now, it will probably be a good investment now."
11. Some other thoughts.
If you really want to accumulate an edge. Or , at least, figure out how to accumulate an edge, you must read an enormous amount.
- the biographies of the best investors
- study interviews they give
- read the history of investing.
- read the history of investment bubbles.
- read about every investment strategy . from value investing to growth to bonds to options to real estate to quantitative, etc. I will provide a reading list at some point but two books to start with:
- read any bio of Buffett
- read fooled by randomness by N. Taleb
- read the histories of successful companies.
- read about the economy and the relationship between the markets and the economy.
- related to that: read about the great depression and the great recession.