Business Of Finance is in the business of providing individuals with quality content with the intent of bettering our readers' odds of being successful in the financial markets. We have a clearly defined mission of helping traders and investors stay ahead of the curve.
In our time in the business, we have seen an awful lot of rubbish emanating from the likes of so called "industry experts" and "gurus" who are essentially salespeople dressed as market professionals selling selling snake oil. The sad reality is that an equally awful lot of the retail community buy into the hyperbole. In the often convoluted world of trading and investing, the word of truth often gets drowned out by the pomp and hoopla.
In our perpetual quest to shed light on the truth behind the business of trading and investing, we have collaborated with a former market professional, Lukas Neely. We feel that Lukas brings constructive material to the table through his works. We are henceforth both pleased and excited to be collaborating on a common ground towards a greater good for the retail trading and investing community.
Enjoy the read!
Value Investing: A Value Investor's Journey Through The Unknown
Narrative By: Kenneth Koh
Editing By: Jared Ling
Beating The Odds
People start trading and investing for a variety of reasons. Some do it because they get introduced to it during their course of study. Others simply see an advertisement with promises along the lines of 'great returns with little efforts' and are drawn in hook, line and sinker.
Whatever the motivation, the main goal of trading and investing is simple: To make money.
Every year, thousands of aspiring individuals join the ranks of retail traders, aiming to beat the odds in the financial markets, hoping to be the next George Soros or Jessie Livermore. The advent of technology now means it is now possible to start trading in less than an hour with real capital. Gone are the days where you had to call your broker to initiate or close a trade; you now monitor your portfolio at the comfort of your home, or in your palms during your daily commute.
Retail traders are given real time information on the markets, allowing them accessibility like never before. The barrier to entry has never been lower. When asked, the average mid-age working professional would probably claim to be a trader or an investor. Most trading applications are available for free, real time data is streamed directly to our devices. All these being said, it is fair to conclude that the penetration electronic trading has had on the retail community is nothing short of staggering.
Implore for one moment though. Are most retail traders and investors consistently profitable? You may be shuddered at this statistic that has stood the test of time: At least 90% of retail traders and investors loose money. The markets are a zero sum game; that in layman's terms simply means that for every dollar made, there is a dollar lost. After deducting the logistical and administrative costs of execution and portfolio management, the landscape becomes one of a negative sum game. This is not nomenclature; the sooner the retail community realizes and deals with statistic, the closer they are to beating the odds.
Trading and investing aren't just about having the right system, the right indicator or signal. Its about having control over your emotions:
Say you got your system handled, you've done your homework and decided the time was right. You bought a stock at $40. You were in this for the long term. Suddenly, over the course of a couple of weeks, the price drops 50% to $20. What do you do? Do you close the position? Fear usually creeps in at this point. What if price drops to $10?
What would you then do? You become anxious, and extremely so. You may try to cover your paper losses by opening more positions on other stocks in hopes that they will be your saviors by performing well.
The succinct example above is the result of an improper mindset towards the business, in which emotions easily overwhelm rational thinking, even amongst the experienced.
A correct, rock solid mindset can be cultivated by having a set of rules.
Unfortunately enough, a lot of the retail community often start on the entirely wrong foot; diving into the business with reckless abandon, all in the hopes of striking it big. It almost always ends in shambles. As dire as the statistics are, there exists consistently profitable traders and investors.
With the right guidance and approach, most of the retail community would better their odds by a quantum.
Meet Lukas Neely
Lukas Neely is the Founder of Endless Rise Investor and Value Investor Confidential, a premium monthly newsletter for Endless Rise Investor readers where in-depth interviews are conducted with top performing investors on their best ideas.
He is a former hedge fund portfolio manager, with real world experience managing millions of dollars. Today, he helps individuals invest better through his work.
Based on extensive research, and one-on-one interviews with some of the top performing investing experts and minds in the world - from Mitch Kovitz, Vitaliy Katsenelson, Jon Shapiro, and many more - Lukas has created a simple 5-step multidisciplinary blueprint that anyone can use to create investing success through value investing.
Lukas has a great way of using real world examples, case studies, and stories to illustrate even the most complex investing concepts - making them simple and actionable. As an author, Lukas walks readers of every income level through the steps to becoming a successful investor by creating a lifetime investing plan.
A Lighthouse For Investors
Remember how we were talking about mindset and how it is so important for us traders and investors? "Mindset Mastery" is one of the fundamental steps featured in Lukas's latest book, Value Investing - An Investor's journey through the unknown.
Below are the five components of his Mindset Mastery. We have added our own thoughts and short summaries on each components. We also feature quotes from the book.
Having been one of the first few people in the world to have read Lukas's new book, we are excited to be able to give our two cents worth. The book's content has been nothing short of excellent; presented in a palatable manner so that anyone with a desire to learn and improve in the field of value investing can benefit.
The book starts off with a fantastic prologue that addresses common misconceptions many retail investors bear. The narrative then leads readers to discover and understand the landscape investors operate in. The book then proceeds to discus about mindset mastery and embracing a practicable philosophy towards the business. Lukas then shares his very own analytical framework; a good part of the book focuses on this aspect. Finally, the book concludes with an extensive write up about the differences between perception and reality.
All in all, we feel the book strikes a delicate balance between the mental and technical aspects of value investing, both of which are equally important factors in achieving long term success in investing. We thoroughly enjoyed the read.
Discovering Your Flow
Getting into a "State of Flow" is defined as an operational mental state in which there is complete involvement, energized focus and full immersion in an activity. This is also known as being 'in the zone'. When you are in flow, concentration becomes de facto, the task at hand seems easier and there is unparalleled focus.
When we are in this state, we lose spatial track of time. Think of the last time you did something and experienced all this. For example, playing a sport or an instrument. We all have experienced flow, someway or another.
Being in flow is then of course, helpful towards investing; we dare say it is a potent weapon when mastered.
"Warren Buffett talks about it all the time. He says it’s all he thinks about --- he’s just "wired for investing." He also has a framework to discern good investments from bad. And over the years, he’s developed mental models to keep him focused on factors that matter most in investing. These mental models keep him focused on the task at hand and they keep him out of trouble. They keep him in the zone (or “in a state of flow”)."
Being in flow greatly flattens our learning curve. However we still need to know what we are doing - we need a framework. We will discuss that at the end of the article. For now, we will focus on the most important components to investing success.
Investing Is A Business
Many treat investing as a leisure activity; the reasons are aplenty. There are a plethora of so called "surefire" and "low effort" strategies that promise investors outsized returns. All investors need to do is buy the strategies, and they don't come cheap. These so called gurus would like you to believe that investing is easy, if you follow their methods that is. Most of these gurus do not have a proven track record of being consistently profitable in the financial markets.
Investing and trading may not be one's full time profession, but that doesn't render it a hobby. None of the successful investors we know of treat investing as a hobby. Then again it boils down to our approach to an endeavor. Remember, your primary reason for investing and trading is to make money.
Personally, we find the above analogy to be a little disrespectful to the profession. Investing and trading are like any other business. A lot goes into a successful and profitable business. That includes effort and time. These are sunk costs that all successful investors have paid over their course of investing. What we gain from these sunk costs are for ourselves to decide.
Simple Doesn't Mean Easy
Market professionals such as Lukas understand that investing can be simple, but it is never easy. Like in any business, hard work and diligence pays.
As an example, Lukas contrasts the habit retail investors have of searching for many opportunities (looking for as many stocks as possible) to the more sensible approach of waiting for a few stocks to payoff well (striking when the iron is hot). In short, quality over quantity.
"Instead of being on a constant search for stocks that may or may not produce results, an investor should instead patiently wait for that one stock that promises to deliver profitable results over its lifetime. These investment opportunities may be few and far between but must meet a very specific set of parameters in order to make the grade."
This ties back into having a framework and a system to ensure one makes the right investment. A stock has to qualify for your attention, not the other way round. This is again contrary to popular belief; but also remember that it is these popular beliefs that lead 9 out of 10 investors astray.
Less Is More
Approach investing like a real business person. Trading and investing is a business. Picture yourself running your own cafe, shop, supermarket, or selling your own products online. You would have a business plan. You would study your competitors. You would take into account the risks and rewards for every possible decision.
You would ensure that your customers are happy, products are moving and employees are working well. These are things that business owners and managers deal with everyday.
The same applies for trading and investing. Why should you approach it any differently? It is your money that is on the line after all is said and done.
This rule also applies to trading. Many traders think that more trades equals more profits. That cannot be further from the truth. While some trading styles are geared for high activity (e.g. scalping), you must understand your limits within your preferred trading style, otherwise you will end up over-trading. At the end of the day, your broker will be smiling to the bank but we cannot say the same for a person that over trades.
No Risk, No Reward
Risk management is one of the pillars that both we and Lukas stoically allude to. There is no fancy attribution to this fundamental principal, but it is so instrumental to the business of investing. Investors certainly do not want to be found without pants when the market turns against them.
Investors are rewarded for undertaking these risks in the market, if they do it correctly. It is therefore inherently crucial that investors understand their downside before they can expect any upside. Taking controlled and calculated risks is a lot of the game.
"A business person is constantly evaluating the risks and probabilities of those risks. They want to know all the possible ways they could lose money and how to minimize those risks. Understanding the unique downsides to any business venture is similar in terms of how you analyze your risk investing in stocks. You want to focus as best you can on how you can negate or shield yourself from risk."
Commitment & Perseverance
This is something that all investors and traders need to have running in their blood.
We spoke about how emotions run the show when the going gets tough. It is important to have control over your emotions and deal with them appropriately. A psychology that is grounded deep within the principals of investing, such as those Lukas has espoused in all of his timeless work, will save investors a lot pain - both financially and mentally.
How though should one's psyche be? The Oracle of Omaha, Warren Buffett sets the bar pretty high, “unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”
Rome wasn't built in a day. A rock solid psyche is likewise learned and honed over time spent exposed to the markets. As much as investors would like to expedite this process, it mostly boils down to one's aptitude to learn from the many mistakes that await us as we journey deeper into the wilderness that is investing. Commitment and perseverance are two qualities that will see us through our darkest of days.
This does not just apply to investing. This is about essence of the business. Why did you start trading and investing? What was the motivation? It is inevitable that there will be days we feel like giving up.
Being pragmatically optimistic allows us to be opportunists regardless of how our portfolio is doing.
"Always keep in mind that investing could change your life and your family's life someday. If you keep persevering, and if you keep learning, you will be rewarded in the end."
We will add that your success will eventually be commensurate with your desire to succeed. Time merely evens things out. Think long term, and believe that with the right guidance and enough practice, success will have no choice but to marry you.
Prosperity, A State Of Mind
To be successful in this business of investing, we need to free our minds of preconceptions that are just not true. Once this is done, we are one step closer to finding success in the markets. Embracing a positive attitude from the get-go is a good start.
Ever wondered why the proverbial circus elephant, despite all its physical might and strength, can be anchored down with a rope tied to a flimsy stick speared to the ground? Years of training and mental massaging by the circus masters have taught the elephant that the combination of ropes and sticks represents repression, a state of mind that has been instilled since its youth.
"Thousands of years of evolution has hard wired our brains to act (or react) to certain situations in certain ways. Unfortunately, many of these reactions are counterintuitive to our goal of achieving wealth and prosperity through investing. Prosperity is not a state of financial well-being. It’s a state of mind. But in order to be successful and run through the barriers of life and investing, you need to arm yourself with this prosperous mindset. It’s an attitude about how you approach life."
Successful traders and investors are not merely good at their business; they are generally also successful in life. This is because trading and investing are not mutually exclusive activities; if we do it right, it becomes part of our lives. This is the magnificence of it. The lessons that we learn in our journey to become successful investors are totally applicable to our lives in general.
The financial markets can be a dangerous and merciless jungle. A place full of savage bears and raging bulls. Arming oneself with this mindset will pay dividends, literally and figuratively.
Successful investing is a journey, not an outcome.
Always remember the two P's - Patience & Perseverance. Altering your mindset takes time and perseverance. It will be difficult, but the rewards you reap are well worth the effort.