A 24-year old graduate student recently turned a $500 investment into $203,411. In less than three weeks.
There are nearly 93,000 bitcoin wallets worth over $1 million dollars (BitInfoCharts).
A couple on TikTok netted a more than 2,000% return on their trades in one month on Robinhood.
Lately it might feel like everyone around you is getting rich (again). Are you?
My guess is if you are reading this essay, you are not one of these examples. But you can get rich, too. We are all investors, and technology has made investing much easier than ever before.
There are two distinct types of investors: Amateurs and Professionals. Amateurs don’t have any idea what improves the odds of achieving good outcomes in the markets. That’s not to say that Amateurs haven’t made money investing—investing will always involve luck. But Professionals know how to increase their chances. They know how to get rich consistently and stay rich forever.
Even if investing is not your full-time job (and even if you don’t have plans to transition careers), you can also become a Professional.
The journey beyond Amateur investing is fraught with obstacles. When Ernest Shackleton recruited men for his Endurance expedition, this was his newspaper ad:
“Men wanted for hazardous journey. Low wages, bitter cold, long hours of complete darkness. Safe return doubtful. Honour and recognition in event of success.”
Sometimes this is what the journey feels like. But if you haven’t been putting much thought into where you’ve been investing your hard-earned money, this may be the most rewarding expedition of your life. One great investment can establish financial security for you and your family for the rest of your days.
There is one barrier that we all face to become a Professional: Resistance.
I’m here to tell you how you can beat it.
Here’s the roadmap:
- What is Resistance
- Adopting the Larry Principle
- Creating an Investment Policy Statement
- Using a Trading Journal
- Developing an Investment Thesis
- Additional resources
Resistance: Our Greatest Barrier
Stephen Pressfield wrote a great book for creatives called The War of Art.
One of the big ideas in the book was this: most people face Resistance when doing anything hard, especially creative work.
Resistance is many things, but my favorite definition is this: the powerful, universally experienced force that keeps individuals from realizing their potential.
Investing is both an art and a science. You can be the greatest math-whiz on the block (Wall Street calls them “quants”), knowing everything about Sharpe ratios, programming trading strategies, and statistical analysis. “But math alone does not make money,” says Eric Peters, Chief Investment Officer of One River Asset Management, “at least not forever—even if there are times it appears otherwise” (wknd notes).
That’s because investing is also deeply subjective. The universe changes just when everything seems to fit perfectly into our mathematical models of finance. Since the future is never a perfect repeat of the past, no amount of historical data can replicate exactly what will happen, and so it’s up to us, the imperfect and fallible humans we are, to know when to change course, when to recognize the qualitative forces reshaping our reality, and when to make a new judgement call on how tomorrow will look different from today. The markets punish those unwilling to change. Amateur or Professional, no investor is safe from this threat.
Similar to how an author may feel Resistance when writing a book that aims to both follow rules and break them, investing follows a similar journey. You learn the rules of the game, but you don’t make money by following everyone else. You have to be different early on and trust that people will eventually recognize your genius. This is what makes investing—like creative work—uniquely individual, and therefore no exception to Resistance.
We can all become better investors. Maybe not as good as Warren Buffet or Ray Dalio, but we can certainly become better than the investor we are today.
Beating Resistance is so hard because we desire immediate gratification. Many people are now using TikTok or Reddit to decide what to invest in. I’m not saying that’s inherently bad, but the problem with getting your information from 15 second videos and message boards is that short-term input tends to lead to short-term output.
We get the immediate gratification of being told what to invest in, but we fail to consider situations like how to react if the price goes down, when to sell if the price goes up, or whether there’s a better investment opportunity out there in the first place. Investment firms have collectively made billions, if not trillions, using predictive models to decide these for them (but have also lost money on these models too). Since not all of us have state-of-the-art technology and teams of quants to make these decisions for us, we must make these decisions for ourselves. This is not easy.
A friend of mine asked if I’d be willing to join a monthly Zoom call where him and his cousins discuss investing. When I pressed him for more details, he admitted one of his cousins “is the type that just wants to be told what to buy. He called me to buy GameStop with him when he saw the message boards and the price going up”.
This is Amateur investing. We do this because we easily become impatient and lazy in our thinking. In other words, we rely on our reflexive brain. The reflexive brain has helped us for millions of years to recognize immediate threats like a saber-toothed tiger, but it doesn’t help with long-term decision making.
Great investing often requires a long-term mindset. Warren Buffet famously stated that he reads over 500 pages of financial reports and SEC filings every day. Despite doing this, he didn’t make most of his billions until much later in life. In fact, he made $70 billion of his more than $80 billion fortune after the age of 60 (CNBC)!
Small mindset shifts can help us think longer-term as investors. One trick I’ve found helpful is thinking like an owner.
For example, if I told you to buy your local car wash, and you had the money to do so, what would you do? Would you go on TikTok and see what others are saying? Would you go on Reddit to see if someone’s posted their gains on their latest car wash investment? No, you’d probably think like a potential owner in the car wash business. How much is this car wash making? How much are other car washes making? What is the competitive advantage of this specific car wash? What is the long term future for car washing?
Now let’s imagine you had to explain your purchase to a friend. Would you be able to simply explain what you bought and why?
You don’t necessarily have to treat every stock like a small business purchase. But you must make the willing decision to become a Professional. And becoming a Professional, in The War of Art sense, involves sacrificing now—even if that just means our time—for rewards in the future. Since we’re not biologically inclined to do this very well, we need a process.
The Larry Principle
Professional investors are able to stay the course because they’re always coming back to why they invest, how they invest, and what they invest in.
“Having a plan is important because it’s impossible to make rational decisions about investments without one.” — Larry Swedroe
There is no single right answer. You just have to find what works for you. The only requirement is that you follow the Larry Principle: have a plan going into every investment.
If you’re unsure where to start, here are three tools I’ve picked up that have helped me develop my own process:
- Investment policy statement (helps with your overall “why” and “how”)
- Trading journal (helps you reflect on your decisions as an individual investor)
- Investment thesis (your “what” and “why” behind specific investments)
Let’s go into more detail on each of these.
Investment Policy Statement
The investment policy statement (“IPS”) was something I took from Ben Carlson, portfolio manager at Ritholtz Wealth Management LLC.
In a nutshell, “an IPS is a written document that will be there to guide your actions and decisions during uncertain times”.
You answer questions related to the purpose of your investment plan, which might include, but are not limited to:
- Your long-term expectations and goals
- How risky or aggressive you’re willing to invest
- What you feel comfortable investing in
- What you will never invest in
- Your overall investment philosophy
I review my IPS a minimum of once a year, but really I come back to it anytime I feel like I’m going to use my reflexive brain on a major trading decision.
Create an IPS today by answering the prompts above. It doesn’t need to be fancy—the most important thing is getting started. Here’s my own IPS if you’re looking for inspiration. For more information on investment policy statements (and additional prompts for your IPS), check out Ben’s blog article here.
A trading journal was something I took from Binance Academy, an educational resource from crypto exchange Binance. A helpful definition of a trading journal—directly from their website—is “a document where everything you do as a trader is recorded, including strategy development, risk management, psychology, and more”.
I find trading journals helpful for recording the psychology of a trading decision: did I really think it through, or did I make an emotional decision that I’m going to regret later?
An investment thesis is your quantitative and/or qualitative prediction on a potential investment.
It can look very different depending on the investor, but I’ve found that good investment theses tend to follow a similar pattern:
- They’re developed using a fairly systematic decision making process. If that process changes from one investment to the next, you may be compromising your ability to filter out bad investments from good ones.
- They tend to have a mix of both quantitative and qualitative analysis. Here’s a great example from billionaire investor Chamath Palihapitiya.
- You’re able to explain it to someone else simply enough that they understand you. One thing I learned from Peter Lynch, former fund manager at Fidelity, was the two-minute monologue. If you’re able to explain to a child what you invested in and why, under two minutes, you’ve successfully explained your investment thesis.
- They identify how a company plans to grow earnings in the future. All else being equal, the more money a business makes, the more valuable the business.
From my own personal experience, developing a good investment thesis is what faces the most Resistance. But this is perhaps the most important thing you can do to increase the odds of a winning investment. Having an investment thesis allows you to identify gaps in your thinking, refine your process for future investments, and prevent you from selling too soon (or selling too late).
To get started, pick a stock or crypto asset you really like and write down why it’s a good investment. Read it back to yourself. Does it sound compelling? Does it sound convincing enough that if you showed it to a friend, they’d want to invest in it, too?
Stories play a role nearly as much as the numbers. If you don’t believe me, look at Tesla’s stock performance. Growth in sales and a decreasing cost in car batteries aren’t the full picture. It’s the story of saving a planet from fossil fuels. The CEO-founder that posts memes on Twitter probably more than he attends Zoom meetings. All the while running three other companies.
It probably would’ve taken two hours, tops, to do the necessary research on Tesla and determine their growth story is worth investing in. $1,000 invested in Tesla stock back in 2016 would have been worth nearly $23,000 five years later (Benzinga). Now imagine if someone bought the stock at that time for $37,990, the current retail price for a Model 3. They’d have enough money to buy Tesla’s entire suite of vehicles!
Investing is like finding buried treasure, and predicting why that buried treasure will be worth even more in the future. Far from perfect, here’s my own investment thesis on Beyond Meat, if you’re still unsure where to start:
While these are just a few tools and strategies that I recommend to newbies, ultimately you’ll need to find what works for you and iterate as you progress.
Decide to Become a Professional Today
Resistance prevents us from realizing our full potential as investors. To beat Resistance, decide to become a Professional: think long-term, follow the Larry Principle, and educate yourself to continue leveling up. Getting rich is never guaranteed, but becoming a Professional will help increase your odds.
For additional resources on better investing, here are some recommendations:
A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan
by Ben Carlson
One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
by Peter Lynch and John Rothchild
by Jack Schwager
Animal Spirits Podcast
by Michael Batnick and Ben Carlson
Invest Like the Best
by Patrick O’Shaugnessy
Save Like A Pessimist, Invest Like An Optimist
by Morgan Housel
Peter Lynch: The Single Most Important Thing
by Jon, Novel Investor
Thank you to the Compound Writing members who reviewed this piece: Ergest, John Lanza, Steven Ovadia, Kyla Scanlon, Alberto Sadde, Chiara Cokieng, Nick Drage, Angelo Luciani, and Amber Williams. Thanks to Patricia Morad for the final edits.