10 Bad Habits Killing Your Portfolio
Posted November 17, 2022
I've had every one of these bad habits. And I've lost a lot of money along the way. I've been so stupid at times. In 2000. In 2008. And many times before and after.
But bad habits can swallow you up (A fixed mindset: "I'm a bad investor and a bad person") or they can help you grow ("I can work hard and learn from this").
Hopefully I've done the latter but I guess I won't know until I'm dead. I can say I've gotten a little better.
One way to make more money investing is to have good habits. But another is to simply get rid of bad habits.
For instance, I know many people who invested in FTX. They've lost their money. But by investing in FTX they've learned the crypto landscape well enough to know that money is now fleeing into the alternatives.
Companies like Coinbase or DeFi exchanges like Uniswap.
Or they are simply buying Bitcoin on the Nasdaq by buying the stock GBTC which trades now at a 40% discount to its net asset value.
Bad habits need to turn into Good habits over time in order to become a successful long-term investor.
Here are some of those bad habits:
1. Position sizes too large or too small.
Position sizing is a complicated subject. It depends on the risk-reward of an asset, the probabilities of success, your personal mindset (i.e. how much you can bear to lose - both financially and emotionally), the length of time you hold the asset, the volatility of the asset, whether on margin or not, etc.
As an example, for me, if I am first investing in a stock, 1% of my portfolio is the right position size. Same for private investments. This is down from 80% of my portfolio 22 years ago (I was stupid).
2. No gambling.
I need to know what my advantage is in investing. If I am just guessing or I "think" this will go up because it's gone down too much then that is not good enough.
I need to have some reason to think that my knowledge about the asset is more than other people's. Not in an "inside information" way but perhaps my experience, or the experiences of people I know, or see other smart investors in there, etc.
This does not mean the investment always works out because I have some extra advantage. It's just a way of de-risking.
3. Not Testing
As much as possible, test your strategy. If you have an idea that says, all stocks with bad earnings reports go down for four days and then go up on the fifth, then figure out how to test that idea. You can use software like "Wealth Lab" , sold by Fidelity, to easily test ideas like this.
If you believe that, on average, stocks that trade for less than book value go up, then you can test this.
Some things can't be tested. It's often hard to test strategies for private or VC investing. But some things that have been studied (You can google finance-based academic studies - is it better for a founder to have sold a company before? Is it better to have VCs in your investing round? Is it better to invest in a series A vs a series C, etc.
This is not mandatory, of course, but is also useful in de-risking. It's a type of advantage you can have over others.
4. Don't invest by myself
This one is particular to me. I invest in private companies.
I used to find the companies myself and think, "this is great, It's just me so I will get a good (low) valuation and make a ton of money".
Always better for me to co-invest with others smarter than me. My only statistics on this are many many anecdotal experiences.
5. Not Sleeping
I was a day trader for many years. I had data on stocks that I wrote software to try and find patterns on when stocks have a high statistical likelihood to go up. I had the open price, the close price, the high price, the low price, for every day (also for every minute, for every hour, etc).
One time I mapped my P&L for each day as if I were a stock. What was my open , my high, my low, my close for the day.
I tested all sorts of things. Like were Thursdays a good day for me? Or the first of the money, or the last day of the month, or option expiration day. I tested many many things.
One result stood out. If I got eight hours sleep I was a better day trader the next day.
6. Not Knowing History
I was talking to an "elections expert" about the midterms. He was wondering how often midterm elections went to the party not in the Presidency. I started thinking back to 2010, and then to 1994.
He said, "whoah, whoah, that's before my time."
No it's not.
Read a book. In fact, read many books. Know investor and market history back to the 1500s or earlier if you can. Know every crash and what caused it. Know every bubble. Know the story of every great speculator. Read even fictional books on market events. Read biographies. Read histories. Read about the first central banks (France and England. and their respective famous first bubbles), read about railroads in the 1850s and the various crashes leading up the Great Depression.
If you want to be a serious investor you have to read non-stop.
7. Not knowing the basics when looking at a company.
Understand where their revenues come from. Where the earnings come from. Why are earnings different from cash flows? What the various ratios are (P/E, enterprise value / EBITDA, P/book, etc). For private companies, understand what their burn is and how much cash they have and when they will need to raise again and what happens if they can't raise again.
Know the valuations of competitors in the space. And how those valuations have changed over time.
Many people think XYZ stocks are "cheap" because their price is less than 10 or "expensive" because their price is less than 100. Understand what it really means for a stock to be cheap or expensive.
8. Not understanding risk
Always understand what the worst case scenarios are in every strategy.
Obviously the worst case for a stock is it can go to $0 but more likely, for a mature company (e.g. Microsoft), in any one period, it can go down about 50% (think pandemic or recession) but in general it has steady revenue growth and will usually end up higher.
So then your risk is if you have the time to handle the periods where it goes down 50% (it has a "drawdown" of 50%). Do you need the money soon? It's ok to invest with money you need soon. But then you have to pick your investments accordingly.
If you need the money in six months, don't buy a house, for instance. Or don't invest in a private company where the CEO is saying, "we will probably get acquired in six months". He won't, and he won't pay your bills either.
By the way, I'm only saying this is because I've made all of these mistakes.
You become a better investor, the better you are at understanding risk.
There's several kinds of risks:
- acts of god risk
- market risk
- strategy risk (a strategy works until it doesn't. Every strategy eventually doesn't work for some time period).
- individual asset risk (like a stock, a house, etc).
- your personal psychological and fiscal health risk.
And each of these risks can be broken down further.
A stock, for instance, has debt risk, customer risk, economic risk, corruption risk, etc.
9. The past is the past
When I was day trading, on days when I lost money I would often feel bad about myself. "I'm no good." Or, "If this happens every day, I'll be broke in sixty days". Etc.
None of these things are true. You need to be rationally optimistic at all times. A bad day today doesn't mean a bad day tomorrow. Unless you are not aware of other bad habits on this list you might be doing.
Learn from mistakes but also don't fall into the trap of trying to change course after every bad day.
If you put in the work of having a good strategy, testing it, understanding the risks, etc then have faith in the work you've done and understand that not every investment works out. Stick to your strategy unless there's a reason to change the strategy.
Keep reading and learning. Keep studying your own investments. You also don't have to be in every deal, every investment, invest every day.
If you simply stop bad habits you will make a lot of money.
10. Not admitting you're an idiot.
I did a study once: I took all the bank analyst recommendations on January 1 of how much the market will make or lose in the upcoming year.
For 15 years in a row the average of the analyst predictions were at least one standard deviation away (usually means about 10-20% off in either direction) from what the actual returns were.
Nobody knows anything.
A good investor knows they will be wrong often, reduces risk, reads a lot, uses a tested or well-trodden strategy, has faith in themselves, sleeps well, has a positive outlook on life and lives a healthy lifestyle, never assumes they know more than the markets, always looks for advantage, and I'll repeat again: reduces risk.
Understanding how deeply flawed we are as rational beings is the fastest way on the path to being a good investor.
This forces us to be curious and hungry and never satisfied. Look for the truth about the world and how that truth is unraveling into the future and you have a chance.