My Errors In Investing
I am writing this post to internalize the lessons learned from my investing (in public companies) mistakes over twenty years.
Chapter 1 (2000 - 2003)
My journey of investing in public companies began around year 2000, at the peak of the dotcom bubble. At the time, all I remembered about investing from my recent MBA was that companies trading over a P/E (Price Earnings Ratio i.e. price of the stock divided by earnings per share) of 15 were overpriced. People were very excited about investing at the time, stocks were what everyone talked about in social gatherings. I worked with people I liked and respected. They were making money every day in the market and how much money everyone was making was the lunch topic every day. I brought up P/E ratios in the conversations and they all laughed and said it was a new economy, old rules didn't apply. I thought this is why people say that reality is different from school. I was applying what I learned in school and not making any money in the stock market. On the other hand, my coworkers, who were smart and more experienced, were making money every day. So, I gave up all logic and reason, and started buying whatever stocks they were buying. After the bubble burst, I lost more than 80% of the invested capital. That was my first foray into investing.
Good news was that I was just out of grad school and I did not have much capital to invest.
1. Develop an independent mind. Speculation is not investing.
2. Intelligence in one domain does not always transfer to another domain. My coworkers were really smart engineers but it did not make them good investors. They were speculating.
3. Investing is a long term pursuit. Looking at daily stock market price fluctuation is futile.
Chapter 2 (2003 - 2009)
I did not do any investing for almost five years after the year 2000. In 2003, I was in a marketing role at T-Mobile where I was spending advertising dollars on direct mail, newspaper ads, etc. (yes, I am that old). Eventually, we moved the ad spend mainly to online ads and search ads. I saw how effective the Google ads were. I was even giving presentations about the fact that everything was moving online. Even then it did not occur to me to buy Google stock. This was an astonishingly stupid mistake. My shortsightedness does not stop there. In 2007, I worked with a Complex Systems Research Scientist, Yaneer Bar-Yam, on a research paper (unpublished) that predicted the rise of Apple with the iPhone launch. Somehow, it did not occur to me to buy Apple stock. Apple is up more than 3,000% since 2007.
In May 2007, I attended my first Berkshire Hathaway shareholder meeting which opened a new world for me. I started thinking differently about investing, business, and life. I read a lot of books recommended by Warren Buffett and Charlie Munger. After the 2008 financial crises, stocks were cheap and based on my learnings from Munger and Buffett, I wanted to buy a lot of Berkshire, JP Morgan, American Express, etc. but I did not have cash. Most of my savings went into my first startup, Mjedi.
4. Develop an investing mindset. When you see a new company with products and technologies that you understand, think about its growth prospects and if you would like to be an owner of that company.
5. Always have cash available for investing. When the opportunity arises, you need the ability to act.
6. When you make mistakes, don't give up. Learn and try again.
Chapter 3 (2009 - 2012)
In late 2009, I joined National Semiconductor (NSM) and all my energy went into that a job which I loved. So, I did not do much investing during that time. However, I did manage to make another investing mistake. NSM was acquired by Texas Instrument (TI) and all my RSUs (Restricted Stock Units) got converted to TI stock and vested when I left NSM. I sold all the TI stock without doing homework about the company and moved to Paris. I think TI's failure with OMAP was highly influential in that decision. TI stock is up more than 550% since I sold it. On top of that I did not think of the tax implications of selling everything in the same year. Living the high life in Paris is expensive so instead of my money growing, it shrank significantly.
7. Do homework before all investing decisions - buying and selling. Understand the entire business of the company.
8. Understand the tax implications of all investing decisions.
9. Save money.
Chapter 4 (2012 - 2015)
I continued to learn more about investing by reading and attending Berkshire shareholder meetings. Since 2007 I have read everything Munger has written and his investing principles are tattooed in my brain. However, it turns out that you can learn some things wrong. I was very emotional about Amazon's lack of earnings and the stock kept on going up, not following any of the Buffett/Munger's principles. So, I decided to short Amazon. Needless to say that was a bad idea. In 2015, I co-founded Ever Curious Corporation, a tech startup, so I needed money to invest. I decided to sell Lululemon instead of selling Berkshire. I was in love with Berkshire and admire Munger/Buffett so I did not give any thought to which one of the two has higher growth prospects. Lululemon has performed 5 times better than Berkshire in the last 7 years.
10. Understand context i.e. how and where to apply your learnings.
11. Keep emotions out of investing.
12. Companies can grow into their valuations. Understand the ecosystem dynamics in which the companies are playing.
13. Become more self aware. Understand how you react in different situations.
14. Don't blindly copy your heros.
15. Write down your investment decisions to clarify thinking. Think about it for a day or two and then execute the decision.
Chapter 5 (2015-2020)
I work in tech and understand tech better than most because I have been fortunate enough to work in all parts of the tech ecosystem (infrastructure, services, semiconductors, apps, AI, Crypto, etc.). However, Munger/Buffett's idea to stay away from tech got pounded in my head over a decade. So, I did not buy any of the tech companies I understand e.g. Google, Facebook, nVidia, etc. Also, I had the idea of low P/E stuck in my head and everything seemed expensive in 2015-2019. I just sat on cash waiting for the market to correct itself. Since 2015, S&P 500 has doubled. Something I did not fully understand at the time was the correlation between P/E and interest rates. When the interest rates are low, P/E is high because there is no better place for people to put their money and money goes into equities (stock market) and that drives the prices up.
When the market tanked in March 2020, I was ready. I bought companies that I have been researching for years. However, my errors didn't stop here. I only invested half the cash I had thinking that prices will go down further. They did not. And, despite all my learnings, I fell into the trap of, if I paid $100 for something, I am not going to pay $110 for it a few days later although I am buying it because I think it is worth $200-$500. Talk about irrationality!
I tried participating in a few IPOs because the companies going public had very good growth potential. Luckily, I did not get any shares allocated.
16. P/E is not the perfect indicator of the valuation of the company. It is hard to know the worth of a company based on how much earnings it has generated in the past or it might generate in the future. The decision you have to make is do you want to own the company at the current price (market cap) based on its history and its future that you are projecting.
17. When you get an opportunity to invest based on your homework, invest a lot and don't think about getting an even better deal in the future.
18. A few percentage points here and there in the stock price should not influence the buying decision if you are buying for the long term (10 years+).
19. You have to get comfortable with doing a lot of work resulting in nothing. Most companies I analyze, I decide not to own. Control the desire to act.
20. It is better to invest in businesses that have a very low chance of losing money and a very good chance of getting a decent return versus businesses that have a high chance of losing money and a good chance of getting huge returns.
Professional investors get paid based on beating the S&P 500 index and most of them don't achieve that. Some years I beat S&P 500 and some years I don't beat it. It is really hard to beat S&P 500 consistently, year after year. A few people in the world have been able to do it in the last 100 years. For most people, including myself, the best investment strategy is to buy the S&P 500 index. However, I do enjoy the process of investing. It is a good intellectual exercise that makes you self-aware and it makes you a better businessman because you learn about capital allocation and you don't forget the mistakes that cost you money.