How I got the stock market wrong

In 2007, my friend said just buy Apple stock. He would occasionally remind me every year or so, but I wasn’t an Apple user until 2013. 8 years after being introduced to Apple Stock, I bought in 2015.

In 2014, a crypto enthusiast told me about Bitcoin. I got my first crypto in 2016.

In 2020, my friends and coworkers hyped up stocks like Tesla and Square. Before the year’s end, I pulled the trigger to grab a couple shares.

At different points of my life, I’ve met people who retired early because of their smart picks.

What did they see that I didn’t see?

Now, if you’re looking for stock recommendations or financial advice this isn’t the post.

This is also not a recommendation to pick stocks, or what to do with your money.

Instead, I’m going to unwrap my psychology and address my blind spots. Maybe you’ll find it useful as an investor trying to navigate this noisy world.

My relationship to investing

When it comes to investing, you have to be right twice to make money: when you buy, and when you sell.

I always had a mixed relationship to the stock market. Having watched my mother lose her retirement funds, I thought of stocks as gambling.

However, the idea that the S&P 500 averages ~10% returns annually always stuck with me.

To resolve this contradiction, I fell in love with the simplicity of Ramit Sethi’s I Will Teach You to Be Rich book. Boiled down, my main takeaways were:

1. Automate finances: money should flow into your 401k, IRA, savings and paying off your bills automatically.
2. Don’t use an expensive financial advisor or buy expensive funds. Instead, invest in low-cost index funds.

This advice served me well. It gave me exposure to the stock market that I wanted (S&P 500 index funds), but protected me from making the wrong stock picks.

These were the beliefs I developed during that time:

I can’t hope to beat professionals who trade stocks for a living

Investing in stocks is too stressful and requires too much effort

Passive investing beats individual stock picking

These beliefs firmly put me in the camp of being an “index funds only” investor.

Meanwhile, the small portions of money I put stocks like Facebook and Apple did phenomenally well.

How much did I over-index on diversification?

Benjamin Graham is known as one of the greatest investors of all time, the father of value investing and the early mentor of Warren Buffett. But the majority of Benjamin Graham’s investing success was due to owning an enormous chunk of GEICO stock which, by his own admission, broke nearly every diversification rule that Graham himself laid out in his famous texts. Where does the thin line between bold and reckless fall here? I don’t know. Graham wrote about his GEICO bonanza: “One lucky break, or one supremely shrewd decision—can we tell them apart?” Not easily.

From Morgan Housel’s The Psychology of Money

This tension behind passive and active investing still remained.

I wondered – is there a healthy midpoint between passive investing and blindly choosing stocks?

Do you even know what you’re investing in?

In retrospect, I saw that my mother lost the stock market game for 3 reasons:

• There were two terrible downturns in the economy, and she realized her losses by selling at the bottom.
• She trusted her funds to an expensive financial advisor, and didn’t know what he invested in.
• She didn’t learn about investing in general, and didn’t know what she was investing in.

My mother, bless her heart, successfully turned her attention to areas where she could affect the outcome. Real estate doesn’t feel like gambling to her; it feels like numbers and understanding a certain niche.

Tim Ferriss is known to only invest in things that he has asymmetric advantage in, whether as a tech industry insider or using his influence to promote companies he likes.

My takeaway? To invest, I should seek specific, not generalized knowledge in my investments.

Thesis-Based Investing

Just surfing Motley Fool and random investing boards is too much noise. Every retail investor has an opinion on why you should buy one stock or another.

This was another investing blind spot of mine – instead of feeling inundated by too much information and taking action, I should develop theses around the world around me:

What trends are inevitable (e.g. electric transport) …and who’s leading the pack in that trend? What companies will change the world? Which ones are radically innovative? Who’s in the early innings of their growth and will become even bigger juggernauts 10-20 years from now?

These are the questions I’m beginning to appreciate.

Even well before Amazon, Facebook and Apple stocks grew tremendously, I was already an active consumer of their products. I had felt and seen the magic.

Now, instead of kicking myself for not investing in them earlier…I’m motivated to develop deeper knowledge and a more well-rounded point of view on companies I’m impressed by.

After all, education on investing is abundant. Analysis on companies and financial reports are free. And so is retail investing (thank you Robinhood!)

With this in mind, I’m going to have my homework cut out for me. I’m going to have to do a fuck ton more research.

But instead of being paralyzed by options, I’m going to pick one company at a time.

My new investing strategy

In a nutshell, I’m going to pick up to 10 companies that I can deeply research and understand. I’ll start with the companies and industries I’m familiar with the most.

Since I work in fintech, these companies are a good start for me. There are also companies that I love and use, like Beyond Meat. Why not do deeper research there?

This is basically a long take on the advice to “Do you own research” and conduct due diligence. It’s so often uttered that I was numb to it, but alas, that’s experience.

So am I just going to dump a bunch of funds into a few stocks? No. I’ll still maintain my current portfolio, and shift to get great exposure to my stock picks.

As a means of self control, I’ll be using recurring buys of these stocks and taking advantage of fractional shares.

For example, in the portfolio example I put above, I can set a regular monthly buy of, say $400, and that $400 will be evenly distributed to my allocation.

That method of investing is called dollar-cost averaging, and will help me as a means of self control (versus going too YOLO on certain stocks).

In the future I’ll do a review on how I manage to do all this with M1 Finance, an impressive and free investing platform.

This article reveals an emergent strategy for me, so I’ll be iterating on my allocation.

If you know any people who do great research and practice thesis-based investing, please make recommendations. I’d love to learn how to become a smarter investor.

Afterwords

I might do a deeper dive on how my psychology around investing has changed, based on these financial inflection points in my life:

• 2000s: Saw my mom’s 401k get wiped out by the dotcom crash.
• 2007: Read Rich Dad Poor Dad.
• 2008: Started college as an Econ major. Only thing I learned is that markets are irrational and people don’t behave as you would expect.
• 2010: Read Ramit Sethi’s I Will Teach You To Be Rich and consumed a lot of info about the merits of index fund investing, especially with Vanguard.
• 2011: Started working in corporate America. Invested all 401K and IRA money into index funds.
• 2014: Read Tony Robbin’s Money: Master the Game; learned and implemented Ray Dalio’s All Weather Portfolio.
• 2015: Felt that my portfolio allocation was too conservative. Got bored and bought some my favorite companies via Robinhood.
• 2016: Learned about cryptocurrencies; bought some.
• 2017: Didn’t sell my crypto, when I should have
• 2018-2020: Looked for safe returns in savings accounts, alternative savings and finances.
• 2020: And here we are, an extremely frothy market.

^ If you’re interested in a more in-depth post on investor psychology, please comment or contact me!