How to learn and evolve as an investor
How to learn and evolve as an investor
Lessons from Racing applied to Investing
September 2021. It was my first time on a racetrack with a proper racing car. I've raced motorcycles before, and I've driven my Toyota GT86 on the famous and dangerous Nordschleife several times. But I have never driven a real race car. That day, I had a test with a team that competes in the BMW 318ti Cup.
Racing is a sport of perfection. You try to pull a string of perfect corners together. Brake as late as you can, hit the apex and accelerate as fast as you can. Put together the fastest lap possible. If you make one mistake, your lap is over.
In those tests with a new car, the development of the lap times usually always the same. You start slow because you have to get used to the car and the track. In the first two stints, you make the "noob gains" - you get faster every lap. Until you hit an imaginary wall.
After a certain point, it becomes difficult to improve your lap time. Finding those last tenths is always the hardest part. The problem is that your driving style does not change. You tend to make the same mistakes over and over again. You struggle with the same corners, the same breaking points. It feels like you are hitting a wall. In fact, you could spend two more days at the track, and you would not improve your lap time.
I also hit that famous wall. But that day I learned the difference between an amateur and a professional. An amateur can never break that wall. He spends most of his life trying to break it, but he never can.
A professional, on the other hand, can break through that wall. But not because he is more talented. Not because he spends more time trying. No, it is because he learns from his feedback and adjusts his style.
That day, as part of the team I was testing for, a rider coach was included. A much more successful rider who went through my onboard footage with me. He gave me his years of experience, applied to my situation. I was able to break that wall the next time I went out on the track. It was almost like I was seeing the track with his experience, finally becoming aware of the mistakes I was making all day. Without his coaching, I would never have seen my mistakes.
The good thing about racing is that the feedback loops are almost instantaneous. After his coaching, I saw the improvement in my lap time almost immediately. Knowing that I was doing better. Knowing that the new "strategy" was working.
You may be wondering what this story has to do with investing. But it can be applied to anything you want to improve at, to anything you want to learn.
In the beginning, it is easy to make progress. You go from "I don't know how to read a balance sheet" to "I know how to read a balance sheet.”
Those are the noob gains.
But then after the first progress is made, you hit the wall. As in any field, most people spend years practicing but never improve.
So how can we improve as investors?
As an investor, we face three problems that make learning from feedback difficult.
a) We make too few decisions. If we buy only a handful of stocks a year, the sample size is simply too small.
b) The feedback loops are too long. It takes months, if not years, to know if we were right.
c) Luck plays a big role.
So what is the solution?
Learn from every decision
In fact, we make a lot more decisions than just buying stocks. We make decisions every day. We decide, to pass on stocks, we decide to hold on to our stocks, we decide to sell stocks, and obviously we also buy stocks.
Use a journal to keep track of all your decisions.
Whether it is to pass on a stock, to sell or even to hold. This way you can increase the sample size of your decisions. It is very important to follow stocks you passed on. It may be painful, if they rise, but one of my biggest learnings have come from stocks where I either bought and was wrong or where I did not buy and was wrong for doing so.
One of the examples was Leatt. One of my first investments where I was completely wrong and lost a lot of money. My whole investment strategy came from reversing the mistakes I did with Leatt.
More recently, I passed on Enterprise Group. Last year at CA $0.45. As you can see, my reason was pretty stupid. I had the belief that you cannot make money with anything commodity related.
Look at the stock price since then:
I learned that if you have a cheap company that is completely undiscovered, and you are confident that it will grow for the next 1-2 years, you should probably buy something. You do not need to find a stock for the next decade. In fact, cyclical companies on the upswing are a great way to make money.
Also, there are many leading indicators that can predict the direction of an industry. In this particular example, service providers to O&G companies tend to be the last to react and less sensitive to oil prices.
Following the commentary of oil companies and the oil price (usually) provides you with enough leading indicators for the macro environment. Fortunately, I was able to apply all of my learnings to another situation a year later:
The stock is up 100% since then. And it has become my third-largest position. Eventually, I made money because of Enterprise Group.
Shorten the feedback loops
Sure, it takes a few years to know if you were right, but there are usually leading indicators that you can use. You won't get a multibagger in one quarter, but one quarter can be a trend. Try to "predict" the next quarter of a company you follow. See if you were right, see what can go wrong in a quarter - and why.
Try to learn from it.
Follow other people’s pitches, the bear and bull case.
If you have been on X this year, the debate between investors over SOWG and ALAR has been extremely insightful to watch. The arguments of the bulls and the bears. Both stocks will continue to evolve, but for now, there have been some interesting takeaways. Even from the sidelines.
Even more useful is reading old pitches from great investors. Or even better, go to a well-followed Microcap on MicroCapClub and you see threads that go back years.
You see what people got right, what people thought would happen, what actually happened. You don't have to wait years for your picks to play out. You can also learn from other people's picks from the past.
Was it just luck or skill?
This is probably the most difficult question in investing. It is impossible to know exactly, but I have some possible solutions. In poker, they say that after about 50,000 hands, I think skill determines the outcome more than luck. The same goes for investing, a track record of 1 year is probably strongly influenced by luck, while a track record of 10 years is less so.
This is also a reason why I like to divide my portfolio into "2022 Decisions", "2023 Decisions" and "2024 Decisions" etc. I want to see if the quality of my decisions has improved (at least in the short term). Ultimately, it comes down to increasing your sample size.
The second approach would be to focus on the signal rather than the noise. Earnings are the signal. The stock price is the noise. Try to predict business performance rather than stock prices.
Conclusion
Repetition without feedback is useless. Try to increase the amount of feedback in investing, while decreasing the time of feedback. Use a journal to track ALL your decisions, hold, sell, buy, pass. Follow as many stocks as you can, to see which stories tend to unfold positively and which one not. Always try to find the right lessons in every situation. Talk to other investors, get feedback on your ideas. Write about your ideas. Read old pitches. Read new pitches. Reflect on your learnings. Share your reflections, see if other investors have had the same or different experiences.
Do all of this and you will grow as an investor.
Disclaimer: This is not investment advice and meant for entertainment purposes only, at the time of this writing I do not hold a position in the discussed companies, but I may initiate a position in the future.
I like the "Status" feature. Which app are you using for journaling?
Great post.