Have You Forgotten Your Investor’s Mindset? [TFC 126]
As we chug along in our investing journey, it is inevitable that we would encounter obstacles that would challenge our investing thesis & mindset. The market is ever-changing so what are some basic investors’ mindsets to internalise and bear in mind so that we can remain steady even if it seems like a rocky road ahead? This episode serves as a reminder for fellow retail investors who may feel overwhelmed with the current market climate.
Inflation, interest rate hike, growth stocks coming down… all these sound like bad news, isn’t it? Regardless of the market shifts, there are some investors’ mindsets that can help us manage our expectations and portfolios. Reggie touched on interesting concepts like the circle of competence to illustrate these mindsets. By going back to the basics, we can stay firm to our investing principles and not get hyped up (or down) by seemingly ‘exciting’ or ‘bad’ news.
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Reggie: Okay, Coconuts! Recently, there’s been a lot of chatter about “oh, will growth stocks, come back? Is inflation going to kill this whole thing or is the interest rates going up… going to kill the whole growth premium?” and all that.
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A lot of people are very concerned, getting very jittery. I get it because nobody likes their portfolio to be in a sea of red. I totally get where you’re (coming) from. But I also know that if you are talking about things like that, then you are very amateur. You’re very new in this investment space which is alright. Everyone is new, everyone starts somewhere. Everyone was new. Some people are not so new already.
Either way, everybody starts somewhere and different people will have different investing style, different investing strategies. I think the better question is how do I then position myself, how do I then manage some of these things? We’re going to continue to have this discussion as we go along.
But today, I’m going to focus on some of the investor mindsets that I feel all of us should internalize as we chug along on this journey to become (a) more sophisticated retail investor. Welcome back.
Good morning, everyone. I welcome you to another day with The Financial Coconut. In our podcasts, we’ll be debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well.
Today, we’re going to focus on investor mindsets to internalize. I think last year, we didn’t really talk as much about mindset. A lot of people are talking about all the exciting things. All these things are happening: inflation, interest rate, growth stocks, all these stuff… And, back to basics guys… We’re going to try to internalize some of these things to keep us rooted and grounded on our investment journey.
For all of you that are vivid listeners of the podcast, I want to let you know that I am currently in Turkey. I’m in Istanbul and yes, I am vividly experiencing inflation. The reality is I came here to experience inflation. I don’t really want to travel to take photo with the Eiffel Tower or Leaning Tower of Pisa or Beijing… Great Wall of China, whatever.
All those things are super touristy. I’m not a big fan of that but I feel like “oh my god, how many people will get a chance to vividly experience hyperinflation?” So I decided to fly in because I was already very near. We will do an episode about inflation and how to manage this thing because inflation is this big word that I think requires us to talk a little more about.
But today, we’re going to talk about investor mindsets to internalize. I want to congratulate you if you have just started on your investment journey or you started last year or the year before. I know, I know… a bit sadistic to congratulate people, especially when some people are losing money.
I’m getting those ping (notifications) on Telegram, on DMs, even in the group chat saying “oh, growth stocks are down. When will it be up? What’s going to happen?” blah, blah, blah. In other words, many people have lost money. They have lost money or they are losing money or they have lost their gains and all that.
All these chatter is a clear sign that you are new. You are young on your investment journey and yeah… maybe a few years in but either way, I want to congratulate you for starting. At least you have begun your journey. This is one of your first big hurdles that you need to cross which is lose money.
It’s not always that you’ll keep making profits. Let’s be real. This is exactly why investments are what it is. It carries risk. It exists. There’s volatility… there are market pricing and all those things they hold. It just so happened that today you are on the other side of the market. You are not positioned as well, so that’s about it.
Also, for all of you that have been invested for a little bit longer and you’ve been making some money or even through this volatile period, you are still at net gain over time. Your CAGR (Compound Annual Growth Rate) or your cumulated returns over time is good, healthy… Good on you, but don’t need to diss on all these other people that are new because we all start somewhere.
We all started somewhere and I’ve lost money before. We’re all just trying to maneuver this whole financial market and eventually, I just want to give you guys the green card. Eventually, if you feel like this is not for you, you don’t want to do the whole complicated, pick-your-own-stocks, look-at-your-own-funds, manage-your-own-portfolio kind of situation, you want to outsource it, it’s fine. It’s fine, you outsource it to the best provider that you can get for the best price that you can get. I think that’s totally okay. I’m not saying that everybody needs to be an investor so don’t need to overly take pride in this idea that “oh, I’m an investor”. Also, don’t need to feel shame that “I have hired other people to do it for me”. It’s perfectly okay.
Okay, enough of comforting everyone. My very first point… first investor mindset that you need to internalize is you learn investing to increase your hit rate, not keep hitting. Remember this, you learn investing to increase your hit rate and not keep hitting. Too many people I hear out there talk about “oh, what’s the next thing? What’s the next thing that you’re looking at? Where should we go next?”
All those things are fine because you’re trying to look for what’s out there. You’re trying to expand your world view. You’re trying to get some information and perspectives from different people to observe like “oh, what is the next market?” and all that. It’s fine, it’s gathering information.
But I know some people, they just hear that and then they hit already. “Oh yeah, someone said this. Let’s just go. Let’s hit it”. Essentially, I think that’s something that it should be a little bit more talked about, a little bit more called out to say hey, don’t need to keep hitting. The reality is the difference between someone that calls himself an investor and someone that is not an investor will probably be the probability of success.
An investor will be more successful in the financial market because they are more probable in that success, not that they keep hitting, keep hitting, keep hitting like, “oh, I keep investing, I invest a lot”. But you know, invest a lot can also lose a lot. Please keep this in mind. It is a very simple idea but actually quite hard to execute, especially in your early days of investing because you have this money set aside and your mind is like “okay, I got to allocate my capital. I got to compound for the long-term. I got to care about the valuation or maybe I don’t need… I just need to focus on growth”.
Different people have different investment goals but I can be quite certain that for all younger investors, newer investors, there is always this excitement. There’s this excitement that “I want to allocate, I want to invest, I want to buy things and I want to… I’m prepared, I am ready. I want to go”. I’ve been there. I’ve been there, done that, that’s why I know and I’ve met a lot of people that have been there, done that.
Nowadays, when I look at investment, I’ve reached a point where I’m like “okay, tell me about it.” I will line it up. When I have time, I will look at it. If I miss it, I miss it. It’s okay. I have many other things I can look at. A great friend of mine once said that you can only call yourself an investor when you get bored of the situation.
Bored does not mean jaded. It is not like you “sian” (bored) of it. It’s just more like “okay. It is what it is. This is the process. I review it, I look at it, I study it and then I make my decision”. It’s not like, “yeah, what we got to do next?!” All that excitement is a very clear sign that you are very young.
Easier said than done, but I hope that you can internalize this thing eventually to recognize that investing is about increasing your hit rate, not keep hitting so go back to your first principles, your investment strategy. Different people will have different investment strategy. I’m not here to discuss whether yours is right or wrong. Even traders… becoming a better trader is also increasing your hit rate and not keep hitting. So different, different investment strategies, different trading strategies. This is something that you must remember. Learning to invest is to increase your probability, increase your hit rate, not keep hitting.
Which brings me to point number two and that is most investors don’t know everything. I may even go to the extend of saying all investors don’t know everything. Everyone has their own circle of competence. We’re going to expand on this after a word from our sponsor.
Okay, circle of competence. You may have heard this, especially if you are a value investor. Okay. okay, I’m taking a piss at value investors… I’ll just say I’m a little bit like aiyoh… because value investors, they are a little bit too prideful that “you know, we (are) value investor(s), we learn from the great. We are like from Buffett”.
By the way, Buffett is not the only guy that does value investing. There are a lot of people that… it was a very popular idea back in the seventies, back in the eighties and maybe even earlier. I cannot remember exactly… there was a research that supported some of these things.
But okay, that’s not the main discussion, but yeah. I just tend to like to take a piss on people that feel like they’re superior. But okay, we move on. We move on from that. Regardless whether you’re a value investor or not, if it’s your first time or you’ve heard of this idea, I’m going to share with you this idea of circle of competence.
This idea of circle of competence vividly recognizes that each and every one of us are limited by our worldview, by our abilities, by what we observe and what we know. In other words, you don’t know everything and nobody knows everything. This is essentially what a lot of people out there as investors, they recognize.
If you talk to the professionals… A lot of the professionals, traders, or portfolio managers, allocators, investors, people that play derivatives, they all do one or two tools only. In fact, a lot of them, they hire the whole team just to do one thing. Go and meet some of these professionals. They trade precious metals. Some of them trade gold, silver. Some of them trade oil, I’m sure you’ve heard (of) oil traders.
It’s like “What? They only do one thing? They only trade oil?” And then there’s this other bunch of people that allocate capital into equities. Some of them even have specific fields or they only allocate in the retail sector or they only allocate in real estate.
Most investors… in fact, all investors, they are limited and they only focus on what they understand. I don’t know why, once it goes into the retail space, people think they can buy everything. They know everything… “oh, I buy a little bit of REITs (Real Estate Investment Trust), I buy a little bit of manufacturing. I buy a little bit of pharma(ceutical). Of course I diversify. Buy a bit of big tech, small tech, metaverse, crypto”.
It’s like wow. That is you misunderstanding the idea of diversification, people. I’m not saying you guys, but I’m saying out there, people feel like they can do anything and everything. I want to remind all of us that every one of us have a circle of competence. What do we understand? Sometimes, there are a lot of people in this circle of competence because it’s a relative, right?
If everybody looks at consumer goods, more people are more relevant in consumer goods because you’re consumers. As consumers, this circle of competence is shared by more people. But if you work in manufacturing, if you work in the supply chain, you’ll be able to see things in a different fashion.
That’s what circle of competence is trying to say. Depending on what you usually do, what are your hobbies, what are your interests, what is your profession, which sector are you in, you have some sort of understanding of the space and you start there. Let’s say you work in a particular field: manufacturing, engineering… Singapore not really a lot… At least not these days, we don’t have this sector or not a big sector so not a lot of people that I talk to, work in this space.
But if let’s say you work in this space, you have a clearer idea of how supply chain works. You have a clearer idea of who is leading the innovation, what are manufacturing processes like. When you have this idea or you have this clarity, you have this level of competence, at least compared to other people, this is a good place to start because you understand this.
But let’s say, you work in retail or you work in finance, you work in an actual company… you work in some things that are like super far away from manufacturing and then your first investment is in some giant manufacturing company. I don’t know what you want to buy. I will be like “huh, really? What do you know about this?”
Or pharmaceutical. A lot of people like to buy Pfizer, Moderna, all this rubbish. They’re not rubbish in itself, but people buy it because it’s in the news cycle but how much do you understand this vaccine process? Do you understand the whole patent idea? How does a patent work? How’s the research process like? Post-patent, what happens? It becomes a commodity and then there’ll be competition. There’ll be white label stuff that comes in. Then what’s going to happen to the business? There’s a lot of intricacy in different business, in different sectors.
When you are trying to invest, you want to invest in a space that you can understand where you are competent. The reality is your competence will grow over time. When I first started, I’ll only invest in things like Starbucks, Disney, Facebook… those things that I use and I slowly understand.
But I was working in a little bit of the tech space. I was in a startup scene so I understand what SaaS (Software as a service) was like. Now everybody understands SaaS, but back then 5, 6 years ago, I am a little bit more forefront. I started to look at some of these SaaS companies: how do they operate? What is the acquisition process like? How’s the retention? How do we understand some of these things?
Eventually, I moved on to learn other sectors, trying to understand how this business work like hotels, tourism… some of these other things that I may have a little bit of interest, but also it took time. It took time, 5 years, 6 years, 10 years. Eventually, you get to understand more and more views and you can allocate accordingly. Your circle of competence will move, but you must start somewhere and you’re not… Let’s be real, you’re not equally competent or you’re not like sufficiently competent in a lot of these space that a lot of people are putting money in.
So yes, if your portfolio is not doing well, ask yourself what are you doing. Are you listening to other people and just putting money or you’re just harping on this growth stock trend or what is going on? Go back to your circle of competence. Start where you understand. Read financial statements. Read annual reports, don’t use control F. I know a lot of people, they’ll teach you some hack, control F, search, search, search in all the annual reports.
Let me give you a straight tip. If you go and read 3 annual reports of company in the same field. Let’s say you want to invest in Starbucks. You read Starbucks, you read McDonald’s, you read Dunkin’ Donuts or Domino’s. You go and read 3 of them. You will get a much clearer idea like what is happening in this field, who is doing what, who is associated with who, who is paying who supply chain fees… a lot of these things, they exist.
Go and read 3 fashion companies’ financial statements. You will get a clearer idea. “Oh, this company is licensing from the other company. Estee Lauder license from Fossil”… blah, blah, blah. A lot of these things, so please go and read 3 companies that are in the same field. You will have a much better idea of what is happening in the field. There’s no shortcut to this, don’t control F.
Eventually, your circle of competence will grow. It may be a new circle, total different sector or you may find that this particular sector, you are very clear, you know better. You may find something that you’re even more competent. Either way, recognize that all investors don’t know everything. Although I say most, but I can say, all investors don’t know everything. Everyone has their own circle of competence. Find yours, take time to grow it, take time to develop. Don’t be in a hurry.
Which brings me to point number three and that is as you become more aware, keep stress testing your thesis. Like I said, everyone starts somewhere. We all have a certain circle of competence and we all probably copied someone’s investment strategy when we first begun. That’s probably the easiest way. Just go and copy someone that has track record and then we take it from there.
But as you go along, you will learn new things. The market will change, sentiments will change, some fundamentals will change. Things like: Is the US dollar going to be the dominant currency or what’s going to happen? Is China going to take over? Are we going to experience an extended period of higher inflation? Are we going to experience an extended period of low interest rates? What’s going to happen? Is interest rates going to go up to try to curb inflation?
All these are bigger changes that will affect your investment strategy, that will affect your investment thesis. Too many people look at their thesis in isolation, thinking that “oh yeah, as long as I do this very well, everything will work”.
Truth to be told, every thesis, every strategy, everything is assuming some stuff. What are the underlying assumptions? That is an endless discussion, we can keep talking about it. But today, I just want us to remember that as you move along, as you develop as an investor, you must keep stress testing your original ideas and develop them over time.
As you develop as an investor, you will learn new things and you will keep evolving your thesis. If your strategy, if your thesis, they don’t change over time, it’s quite interesting also. I don’t know why. Because market is changing, you are changing, your goals are changing. Your palate will change, your circle of competence will develop, so a lot of these things will change. Eventually, you will move along.
Why do I want you to be clear on this idea that, hey, you must keep stress testing your thesis as you become more aware because I feel for a lot of younger investors, a lot of newer investors, because they don’t know enough, they harp onto the original idea that they have.
It may be some guru teach them something, they read a few books from somewhere and they’ll be like “yeah, this is how it is done” and they hold very tightly on it. It is a common mistake. For a period of time, I was like that also. It’s like, “aiyah, this person don’t know what they (are) saying. They (are) wrong”.
I want to remind us as retail investors, as people that are trying to learn to be a better investor, to recognize that market is ever changing, dynamics are ever changing, situations are changing and there are some underlying assumptions that we have stopped questioning. These things are important because when they shake, everything shake.
As you move along in your investment journey, you will learn new things and you should stress test and develop your strategy over time. You will be more nuanced, you will be able to understand things a little bit better. You may have a more sophisticated way of evaluating management, of understanding moats, understanding brand value. Brand value… everybody say brand, brand, brand. How to evaluate a brand? Everybody say “oh yeah, this one got a brand”, but how do we evaluate brand value?
There’re a lot of things that are a lot more nuanced that as you go along, you will learn. Eventually, you will find a system that works for you, give you the results and you can rinse and repeat and then, you will go through this whole cycle of like “oh yeah, maybe it’s not working as well anymore. I should change”, blah, blah, blah. And then, you’ll be like, “oh my God, why keep changing? Why don’t have just static ideas that stays forever?”
I’m like hello people, wake up. The world is not static, markets are not static. Everything is dynamic. We make everything seems static so that it’s easier for you to understand and study but you must recognize everything is dynamic in this world. They are moving all the time. As an investor, as you learn more things, be more aware, keep testing your thesis and improve your investment strategies.
So yes, these are the three investor mindsets that I feel you should internalize. When I say internalize, I mean everybody should absorb it whether or not you are very sophisticated or you’re newer on your investment journey. I’m going to recap them.
Number one is you learn investing to increase your hit rate. You’re trying to increase your probability and not keep hitting. If there’s nothing, take a break. Everybody will give you some ideas. You don’t need to hit every single idea. Hit on what you understand.
Which brings me to point number two and that is most investors don’t know everything. In fact, I can say all investors don’t know everything. Everyone has a circle of competence. That’s where you understand, that’s where you thrive. You know the sector, you know what you’re doing. Eventually, this circle of competence will change. It may develop as you learn new things. As you expand, you may find a whole new circle that you’re even better at. Don’t need to be in a hurry, it’s a learning journey.
Point number three is as you become more aware of different things, you must keep stress testing your ideas, your thesis, your strategies. Things are not static, the market is dynamic. Investment is dynamic, life is dynamic. So with that, I hope you learnt something useful today! See ya!
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Okay, Coconuts. You guys have been asking me for a long time. Investor mindset… what are some investor mindset that I should have when I first start and I hope these are some things for you. I know people are saying all sorts of stuff out there. I think these are the things that I have picked up over time and I’ve internalized them so I thought it works for you.
Next week, we are going to talk a little bit about inflation. I know inflation is the talk of the town. People are concerned like “oh yeah, what happens? Inflation…” blah, blah, blah. But inflation is a lot more sophisticated, a lot more complicated than what most people want to put it.
A lot of your newscasters, they’ll be like “so how? Inflation, how?” you know, it’s like inflation, inflation? Even the auntie downstairs, they also know 通货膨胀 (inflation). They also know inflation and they can tell you in Mandarin. Because why? The taugeh (bean sprouts) more expensive.
But what is important is inflation is very nuanced and I’ve talked a little bit about it in some of the earlier episodes as I reviewed the post-pandemic idea. Inflation can be split up into different reasons why things inflate and different buckets…
I’m going to share with you how potentially you can mitigate or do your best to mitigate some of this inflation risk next week. Take care.
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