Welcome to the first post in what I hope will be an ongoing compendium of curated information for traders and investors.
An obvious question: “have you actually read all of these books!? like, really??”. The answer is yes, absolutely! Many of them I’ve read more than once! I started this site as a way to for me to keep track of the pertinent details form all the various sources that I read. I’m going to begin by focusing on books, but might expand to include other sources that I’ve found useful: websites, papers, podcasts and so on… We’ll see how it goes.
Given that much of the content here is based on my opinion, it might be helpful for me to share some of my general views about trading and investing in order to provide context to the reader. I’m still learning, refining and improving every day, or at least that’s the intention, so I don’t consider the list below immutable, but as of now, this is where I’m coming from:
- Psychology is everything: It’s not the place where most people seem to begin their journey but almost everybody who experiences any form of persistent success appears to eventually end up here. There is a myriad of way in which the human brain is poorly equipped when it comes to making decisions under uncertainty and it’s my belief that one of the biggest advantages the individual can gain in markets is to learn how to understand and accommodate their own biases. I use the term “accommodate” as it is my belief that eliminating bias is impossible.
- Statistical thinking is important: A subtle but significant difference I notice among professionals in the investing (and gambling) world is that, rather than focusing on predicting something that is going to occur in the future, they focus on identifying things which are mispriced in the here and now. Confusing? An example: Average person: Company XYZ is going to change the world so this is a good time to buy. Professional: Company XYZ is going to change the world, but it’s already trading at 1500X earnings, so my view is probably shared by many, my view is priced in, and doesn’t represent an opportunity at this point. Similarly, having the tools at your disposal to be able to evaluate whether an outcome was attributable to skill or luck, and in what proportion, is invaluable.
- Luck drive outcomes in the short term: Closely linked to #2 above – In the short term, the outcomes we experience are random. High-quality decisions can have poor outcomes just by chance; statistically bad decisions, like playing the lottery, can have great (albeit extremely unlikely) outcomes sometimes too. The important thing to remember is that while a few bad outcomes in a row can feel terrible, if your process is sound, it’s probably nothing to worry about. Similarly, a few big wins might feel great, but don’t get ahead of yourself, you were probably just in the right place at the right time. Success in this game is measured in years and decades. Don’t sweat the short term.
- Style doesn’t matter too much: Provided you’ve got a firm grasp on the psychology involved, there are any number of methods can be used to achieve great financial success. Fortunes have been made in everything from “buy-and-hold” and “long-term value” investing to micro-second “high-frequency trading”. What matters in each area differs dramatically, for example transaction costs might be a low priority for a value investor who trades once per year, whereas for day-trader they might be top of the list. Psychology matters a lot too – you’re going to lose occasionally no matter how good your are. Some styles entail frequent, but small winners with the occasional large loss, whereas other styles lose small amounts often, but are profitable because of the occasional large winner. My sense is that there are a pretty large number of valid approaches in markets and the real challenge lies in selecting the approach for you. Said another way: all successful approaches are likely to be equally difficult – the challenge is in determining which pain you’re equipped to bear.
- Systematizing is valuable: A systematic approach, wherever possible, is worth the effort. This is true not just in trading itself, but also in research. Some people (like me) trade/invest in a way that involves almost no day-to-day discretion. Some investment styles are necessarily more discretionary (value investing) but if you study the greats (as we’ll do in this blog!) you will note that almost all of them have some sort of framework, whether explicit or implicit, to help them make higher quality decisions and avoid their own biases
- Compounding does the really hard work: No matter which investment style(s) you employ, compound growth should be the bedrock of your process. In the long run, all the heavy lifting is done by compounding.
- Survival is key: None of the above are ideas worth anything if you fail to survive (i.e. go broke). Being too confident, betting too aggressively, failure to acknowledge bad decisions… all sure-fire ways to ruin a good thing.
The above represents the lens through which I view the financial world as of now. It will evolve, I’m sure, but the point is that this is where I’m coming from when I’m evaluating the usefulness of content. If you disagree with anything that I write (and please do!), try to reframe it in the context of the above 7 items and see if makes more sense to you.