What Am I Missing?

“What am I missing?” These are the four most important words in the world of investing. If you want to invest like a professional, this is what you always need to ask yourself. Unlike, “This time it’s different”. If you hear an investor say this to you, run away! Don’t look back and run away as fast as you can, preferably in a zig zag pattern so he doesn’t get you!

My First Exposure to the Stock Market

I’ve learned an astounding amount about the stock markets and investing over the years. But I never learned it from my parents. Like many people, my parents never invested in the stock market. It was a foreign concept to them, owning pieces of companies. In their minds, the stock market was another form of gambling. People bet on stocks and they hoped it would go up, just like how a person would go to a casino and hoped they would get lucky.

Unfortunately, that’s a view that is all too common among people. And it’s incorrect. Yes, you’re taking on risk when investing in the stock market, just like you take on risk at a casino. But the difference is in a casino, the odds always favor the house. Some games have better odds than others and some actually get close to 50/50, but the house always has the edge. This is why you may have a good day at the casino. Or even a lucky week. But over time, that edge means the house will always win over the long run.

In the stock market, the investor has the edge. If you stayed invested in the market, without doing anything, you’ve compounded a 12% return over the past 30 years. So the stock market is like a casino, except you get to play as the house!

My First Stock Challenge

My first exposure to the stock market was in middle school. We had a contest where everybody was given $100,000 to create a mock portfolio. People had all sorts of crazy strategies. Some invested in speculative companies. Others bought what they knew. Some traded every week, while others held the same stocks for the duration of the contest. Me, I remember picking blue chip companies. I traded every once in a while, but I generally held my positions for the duration of the contest.

I remember being so excited about the contest. Previously, I was only interested in the sports and comics sections of the newspaper (yes, it was that long ago). But for that whole month, I couldn’t wait to open up the business section to see how my stocks fared! I don’t remember doing that well. I invested in blue chips, so it’s not like my picks doubled or anything like that. Imagine my surprise when I found out that I won! For coming in first place, I was given two one-ounce pieces of silver. I still have those today, as a reminder of what started my passion for investing.

Playing for Real Money

Middle school was when I first caught the investing bug. But after graduating from college was when I started investing with real money. As excited as I was in middle school, it’s completely different when you have real money on the line. I didn’t have much money at the time, but it didn’t matter. Real money is real money, and it was a lot of money to me. It’s like trying to play poker with no buy-in. People will bluff and call all the time because it’s just play money. But when you can actually feel the pain, you play a lot more conservatively.

My investments at that time were still companies I knew outside of investing, but I actually tried to understand more about what they did and how they made money. I even started to look at valuation too! I had a full-time career at the time that I was trying to grow, so I didn’t spend as much on my investments as I should have. It didn’t matter though. The stock market was roaring at the time, so I was doing well.

Turning Investing into a Career

After spending a few years investing as a hobby and having so much fun doing it, I decided to turn my passion into a career. I knew it wasn’t going to be easy, but I wasn’t worried. I had spent years investing on my own and I was a rock star! Any buy side shop would be lucky to have me as an analyst!

I graduated from business school in 2010. For those of you not paying attention, that was not a good time to start a career in finance. I think the only worse time to get into finance was right after the Great Depression. Before going to business school, I just assumed that I would get a buy side job right after graduating. Now, I was happy to have any job in finance. I’ve finally ended up on the buy side, but it took a lot longer than I expected, with a stint on the sell side first.

Confusing Luck with Skill

I bring up my personal experience because I started out not knowing anything about the stock market, but I knew that I didn’t know anything. I had no illusion about my skill. I won the contest because I was lucky, pure and simple. When I started investing with my own money, I knew more than I did before, but I was overly confident. I was successful because of luck and a bull market, yet I attributed it to skill. I invested during a time when the market only went up, and I thought I was the cat’s pajamas.

This is where I see a lot of bloggers that claim to provide investment advice. We’ve been in a bull market for the past eight years. Of course you’ve made money. And you may have even outperformed the index by taking on more beta risk, but that doesn’t make you a good investor. All that means is you started investing at a good time.

What am I Missing?

So to summarize, I started off knowing nothing and realizing that I knew nothing. Then I went to knowing something, but not as much as I thought I knew. Now, I’m at the stage where I know a lot more, but know that there’s a lot that I don’t know. Not confusing at all, right?

It’s funny that I’m the most knowledgeable and skilled than I’ve ever been in my life, yet the most unsure. This is why, “What am I missing?” are the four most important words to know as an investor. I am personally responsible for hundreds of millions of dollars. There are no do-overs, like with a mock portfolio. This is not a game, where I can hit the reset button. This is why, whenever I make an investment, I’m always asking myself, “What am I missing?”

what am i missing
I tried to find an image that said, “doubt everything that you do”, but this came up.

Skill Goes Up, Confidence Goes Down

I’ve been investing long enough to know that the stock price is always the right answer. If I’m long a stock that isn’t going up, the question is never, “Why don’t other people understand?” Other people may be missing something, but that can’t be the default assumption, or you will lose a lot of money. You have to always assume you’re wrong. You need to do your own research, verify your own assumptions, and understand how others are thinking about the stock first. Then you need too more research to make sure you didn’t miss anything. Only after you’re certain of your conclusions can you assume the market needs more time to come to the correct conclusion (it’s never wrong).

This is why I’m always talking to other investors on the names that I cover. Maybe they know something or heard something that I missed. This is why I’m always talking to sell side analysts. They talk to more people than I do. They also speak to management more regularly than I do. This is why I’m always calling analysts with opposite views. If I’m a bull, I need to understand the bear thesis. I need to know the bear thesis so I can prove why they’re wrong.

If you want to be a truly great investor, you need to be skeptical. Skeptical of others naturally, but most importantly, skeptical of yourself.

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