Lessons learned from three years DIY investing
Last time out – Chriss McGlone Atkinson, aka the British Investor – in common with many others reported a difficult start to 2018; what has he learned on his three year journey DIY investing?
This weekend marks the third year of my ‘proper’ investing journey; whilst I have been investing for longer than that, it was with far smaller sums, and fortunately I made most of my mistakes then. Hopefully some of my lessons may help fellow DIY investors.
Evolution, Not Revolution
Perhaps the most important thing I’ve learned is that investing is an iterative process; you don’t set out with all the tools you need, nor a complete understanding of what fits your investment framework.
I’ve been trading/investing for nearly a decade, but only began to take it seriously when I was confident I knew ‘enough’ to create a basket of good quality investments.
I had a lot to learn, but thought I’d made enough mistakes to be able to identify companies that should do well in the long-term.
My mistakes are commonplace – listening to opinions on message boards, buying oil/gas companies that show ‘promise’ but never deliver, getting excited by a high-flying share price; three years in, and I’m still learning.
I learned early on what the basic valuation metrics meant. Price/earnings, price/sales, price/book, etc. made sense to me.
Paying 10x a business’ earnings sounded more appealing than paying 30x and paying for a company trading at less than the value of tangible assets minus all liabilities sounded great.
I’m drawn instinctively to the quantitative aspects of valuation; a mathematically minded person is better able to break a company down into numbers than to dive deep into its ‘story’.
‘Investing ability means nothing if you don’t have the patience to see an investment through’
Professor Aswath Damodaran champions learning how to do both, something I am still working on – more here
I have also learned that there’s a difference between understanding a concept such as, for example, return on equity, and really feeling how it affects the flow of a business.
Writers like Phil Oakley and Richard Beddard have helped me break down the operations of a potential investment. Warren Buffett says, ‘accounting is the language of business’; I’ve a long way to go to improve my fluency.
Luck has certainly been a factor in my performance; I’ve made investments that I perhaps didn’t really understand that have nevertheless worked out well.
My best performing holding has been Creightons PLC (LSE:CRL) which I first purchased in October of 2015 for a price of 7.2p.
It met the criteria I was looking for then but I wouldn’t buy it now although as I’ve grown to understand the business a bit more, I’m happy to stay invested and follow their journey.
Was this investment success down to skill? I don’t think so – it was a tiny company and a speculative investment; I think I got lucky!
Investing ability means nothing if you don’t have the patience to see an investment through; I’m fortunate in that this isn’t something I struggle with, although this wasn’t always the case.
When I first had a reasonable amount to invest, I was sensible and picked large, dividend paying companies to buy and hold – think Vodafone, Glaxo, etc; good yields, with good cover.
However, I was logging on to check them thirty times a day; these large companies don’t tend to move very much, and so little was really happening, but I was logging in regardless.
Now I know that time spent fretting is better spent honing my craft and improving my knowledge.
Investing is Fun
I don’t mean fun in the ‘buy low, sell high, lunch is for wimps’ sense of the word, but when I constantly hear how the most sensible option is to invest regularly into a diversified, low cost basket of ETFs I instinctively recoil.
‘I want to try to beat the market, and I will devote all and any energy I have to doing so’
I understand perfectly; most fund managers under-perform in the long-run, and getting average market returns is actually something to be very happy about.
But that would be to ignore a massive part of what I enjoy. Yes, making money is important, but so is the challenge. And it is a challenge. It tests you intellectually and emotionally. It tests your patience, your rationality, your fear.
I want to try to beat the market, and I will devote all and any energy I have to doing so.
‘Gut Feeling’ Can Be Your Enemy
I’ve made stupid decisions because I ‘felt’ it was the right thing to do.
I bought Burberry at £13.78 and sold it a year later for £10.59 because I ‘felt’ they’d made a mistake with Christopher Bailey. Did I refer to my quantitative model in this decision? No – it’s at £22.60 today.
I bought Tristel for £1.18 and sold it a year later for £1.33 because I ‘felt’ growth had slowed a bit. Was it still a quality, profitable company? Sure. It’s at £2.71 today; at least I made money.
I bought Zytronic for £3.05 and I sold it at the same time and for the same reason as Tristel for £3.60. Same reason. Same result. It’s at £5.10 today.
Had I stuck with the rationale I used to make these investments, my returns would have been better; I let my gut unduly influence how I felt about the businesses to my detriment. The lesson for me has to be this: If you invest quantitatively, you have to assess quantitatively.
If you trade based on feeling, good luck to you. It’s not for me, but if it works for you, great.
More Lessons to Come
I have learned a lot over three years. It’s part of the investing journey, one you just have to hope isn’t too expensive for you and I’m still learning, bit by bit.
Refining what I look for in a company, looking to gain a greater understanding of how it works. Each one is a living organism and should be treated as such.
The biggest advantage I’ve found is in reading annual reports. A few years’ worth, if you can; I started doing this three years ago and it definitely marked a milestone in my progress.
Creightons PLC is a constituent of the portfolio.
If you would like to share your thoughts, experiences, highs and lows with a community of DIY Investors please email in the first instance to firstname.lastname@example.org
We would be very please to hear from you; remember ‘none of us is stronger than all of us’
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