I was lucky! Very lucky!
The first chapter of my investment journey ended with a portfolio loss of 70%. Why was I lucky? Because that was the moment I learned my most important lesson in investing. But let me start at the beginning.
I became interested in stock investments in the mid to late nineties at around age 20 when the dot.com era was already in full swing. I wanted to get involved but did not have any money to invest. Or any clue how to invest for that matter.
My dad was supportive of me starting to invest in the stock market and he helped me open my first brokerage account and to my surprise transferred 10,000 German Marks into my account. I had never seen that much money and I already felt rich! The only condition was that I can only use this money to invest in stocks, but it was up to me which stocks to buy. He also told me that it wouldn’t matter how well I would do in terms of performance. My dad did this to let me get my hands dirty for a purely hands on educational experience. And boy did I get an education!
So, I bought a bunch of stocks not knowing what any of these companies were actually doing or even what business they were in. The only exception being Nokia. Every day I checked my balance and every day it went up in value. I thought either this is the easiest thing to make money, or I am just really good at it. Obviously, I was dead wrong in both regards.
When the dot.com bubble burst and stocks started declining in early 2000 I watched my account value melt away like ice cream in the sun. There was nothing I could do about it.
And there I was. Not understanding what happened. Humbled by my own hubris. Down 70% and thinking this can’t be the end of it.
To my credit I didn’t blow it all, eh?
Looking back at this moment I can confidently say that blowing up an account at this early stage was the best lesson I have ever learned since then. And the longer I invest the more I realize how little I know about this game.
But there are some basic principles I am following which have not change over time. This is not an exhaustive list but, in a nutshell, this is what has been working for me:
- Start as early as possible. Time is your friend – the more time you have the easier it is to achieve your financial targets thanks to compounding effects
- It’s a grind not a get rich quick scheme – unless you are a scammer
- Buying risk premia pays off on average in the long run
- Stocks take the stairs on the way up and the elevator on the way down. Don’t panic. You are getting paid to stomach this volatility
- Be patient and consistent in your investment approach; and don’t do too many stupid things along the way. It’s a slow process to build your capital but it’s easy to ruin your progress with a few mistakes
- Be humble and willing to update your beliefs when new information becomes available
- Be aware of your biases
- Greed and stupidity lack of knowledge are a dangerous combination
- Don’t try to control things you cannot control
You also need to pay yourself first and build your capital over time with the help of
- Investment returns from public and private markets
- Returns from active trading strategies
- Employment income, bonuses, stock awards
- Own businesses
- Other windfalls, e.g. inheritance
Please keep in mind that the above has been working for me during good and bad times but this is my personal view. You need to figure out for yourself what works for you or how your own personality determines your investment style – everyone is different.
Some are born entrepreneurs with ideas and the chops to run their own businesses. Others are employees with a regular paycheck. Myself I am a functioning employee and the regular income and bonuses which come with regular employment have been my primary source of income to build my capital stock in addition to investment returns.
I would assume this is the case for most people and you should never underestimate the comfort of a regular paycheck. It’s a whole different ball game if you decide to quit your job and instead fully focus on day trading for a living. Suddenly there is huge pressure on you to perform consistently. You cannot afford drawdowns if you have to take care of your family, pay your bills, and build your capital as well.
It’s in your own hands to make your investment journey a success. It requires effort and consistency on your part to keep grinding on over a long period of time to reap the rewards. So I will conclude this article with a quote of the famous philosopher Ice Cube:
“Do not complain about what you didn’t get from the work you didn’t put in.”