Advice for New Investors

by Geoff Gannon


Quan here.

Someone who reads the blog sent me this email:

Hello Quan, I am Dario. In the past couple of months I have been doing research with stocks and the stock market, I stumbled upon your website and found it extremely helpful through all the research. I have yet to invest in anything and find difficulties to as I am only 19, and am a college student so having money always isn't an option through everything. I guess with writing this email I just wanted to thank you and ask you how I can invest as intellectually as possible with a low amount of starting money.

I was in your situation not long ago so I would like to give some advice to new investors.

 

Invest Like You’re Saving for Retirement

My attitude toward stock investing is like saving for my retirement. I don’t plan to use any money I put into my portfolio in the next 30 years. That frees me from the concern about volatility. I can totally ignore market price. Once I find the right stock at the right price, I’ll buy. And I want the stock price to keep going down. So I can buy the stock cheaper whenever I have more money or the company can repurchase shares cheaply.

I think this is the advantage of individual investors. Money managers with the wrong clients have to pay a lot more attention to short-term performance. You don’t have that restriction if you add money to your fund with no plan to use the money soon. Think like you’re saving for your retirement.

 

Don’t Be Greedy

I started with a small amount of money. Naturally, I wanted to grow that money quickly. I thought I should earn 50% a year like Warren Buffett said he could do with less than $1 million. I’m dazzled by Peter Lynch’s idea of 10-baggers. That’s fine if you stick to their teachings. But my greed led me to compromise on quality of business. Statistical cheapness blinded me and persuaded me that the business is fine.

So, I think for starters, no matter how small the amount of money you have, the priority is always to protect principal, not to grow money quickly.

I think a diversified portfolio of statistically cheap stocks can be fine. But you can’t achieve adequate diversification with a small amount of money. So you should focus on quality of business. Personally, I’m comfortable with buying only one great company.

 

Don’t Rush to Buy

I used to have a lot of ideas when I started. I always had new ideas even when I was already fully invested. But it wasn’t that I was smarter or those were good days. Those ideas were simply junk. Those were just beliefs of an inexperienced investor. I was influenced by numerous human misjudgment tendencies.

I started reading investment books in those days. I learned techniques to value a stock and how to do research. I was overeager to apply what I had just learned. Perhaps buying a stock meant becoming an investor or mastering what I had learned. Therefore, most of my early researches were inadequate. But I ignored those shortcomings and believed that I had good ideas.

My advice here is to limit yourself to buying only one stock in the first year. That will delay your buying decision and force you into following your stocks longer and comparing investment candidates. That will also save you the opportunity cost of buying the wrong company.

Don’t worry about having cash that is not working. Assuming you wait 2 years to buy a stock that would double in 3 years, you still earn 14%. And 14% is an admirable rate of return for any investor.

 

Investing is a Learning Process

Buying inactivity is also a result of my research process. My process was initially started with screening for statistically cheap candidates.

The disadvantage of this approach is that I’m influenced by fluctuations in the stock market. There can be the pressure to do research quickly. I can be afraid that the stock price will go up and I will miss an opportunity. But rushing a research always results in an inadequate analysis.

Also, valuing a stock when we know the stock price isn’t a good idea. We’ll be influenced by the anchoring idea. It’s like when you ask people if a Big Mac provides more or less than 1,200 calories, most people will say less. When you ask them how many, they would say “1021.” If you instead ask if there are more or less than 500 calories in a Big Mac, they’ll say more. And when you ask them how many, they’ll say something like “715.” There’s a high chance that our stock valuation would significantly differ when we know the stock price is $60 from when we know the stock price is $15.

So, I think intelligent investors will do research without the impulse to buy a stock. They learn about the business, expand their circle of competence. They get ready to make a decision when the market price is cheap relative to their idea about the value of the company.

Geoff often tells me that his greatest investments are those in companies that he learned about before and then 5 years later, something happened to the stock price.

 

Write Down All Your Thoughts about a Company

Finally, I used to have problems with following some stocks I did research on. Many times I read my own research after a while, and I realized how incomplete my reports were. Many questions arose while I read the reports. But when I did some research to answer those questions, I realized I already knew the answers before.

I think that’s because I’m not a good writer. I couldn’t turn all my thoughts into a concise, comprehensive report. My solution is that if I can’t write a report, I’ll take notes. I have a checklist including questions about a company to answer. And for each question, I just write down every thesis and all the evidence and then organize them into a draft. I also write down all questions that I can’t answer with my current knowledge as well as hypotheses about the company. It’ll take more time for me to read all my notes in the future, but at least, I can record all my thoughts about a company and follow them in the future.

So, I think buying inactivity, focusing on business quality, learning, taking notes, and investing like saving for retirement are the ingredients for intelligent investing.

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