Ten Tips for Investing Success
I’ve read a lot of books — here are ten of the best and the investing lesson each taught me.
I’ve opened a bookshop!
OK, not an actual physical bookshop, wonderful as that might be. But a virtual bookshop on bookshop.org . This has (at least) two great things about it:
- 10% of sales go to local bookshops, which beats shovelling money into a tax-avoidant corporate leviathan.
- I can also dedicate all profits I‘d otherwise make from this to charity, which is what I’m doing.
The charity is Fairfield Enterprise. It’s all about levelling the playing field in our financial services industry by helping bright students from low-income backgrounds build successful financial careers.
I was lucky enough to meet a few of its students last week, and I was inspired. So I’m trying to help them in any way I can as, frankly, the whole thing rocks.
But WAIT! There’s more: My book shop is also a book club! I’ve wanted to join a book club for years, but most of my local mates aren’t that booky. So I’ve taken matters into my own hands and started a virtual club, which I’ll be running through my LinkedIn profile (for now*).
So check in on that from time to time. It’s informal stuff: We’re going to read some cool books that will make us better investors. Or maybe they won’t — debating that is all part of the fun.
The first book we’ll be tucking into is Edward Chancellor’s ‘The Price of Time: The real story of interest’. I’ve heard lots of good things, and it’s started well, so I have high hopes. We shall see.
If you’d like to join the chat, learn good stuff, meet new people AND contribute money to local bookshops and a cracking charity, then please buy this book through my bookshop: Billion Dollar Book Club**:
https://uk.bookshop.org/shop/BillionDollarBookClub
Right, in the title I promised ten tips for investment success. Each tip comes from a book that either taught me something new that forms a part of my investment philosophy, or does a great job of explaining something else I wholeheartedly believe.
Only two of them are ‘investment’ books. The others have a wider remit, so this list is entertaining as well as an educational.
They’re all available in the Billion Dollar Book Club store, packaged in a neat ten-book list:
https://uk.bookshop.org/lists/the-way-of-the-fox-ten-texts
Here are the tips, and the related book, in no particular order
1. Learn from your mistakes
Book — Black Box Thinking: Marginal gains and the secrets of high performance
by Matthew Syed
What’s it about?
Airlines (with their black boxes) have an astoundingly good safety record. Hospitals have an astoundingly bad one. The difference? The airline industry is open about sharing mistakes and learning their lessons. The healthcare industry, for the most part, isn’t. Syed’s book looks deeply into this theme, and how to use it to improve what you do.
What’s the Investment Tip?
Obviously no-one wants to make investing mistakes. But you will. So make sure you learn from them. This sounds obvious, but mistakes are embarrassing and can make us feel ashamed, so it’s natural for our egos to pretend they never happened. Training yourself not to do this is hard but valuable.
2. Big things pose different risks than little things
Book — Scale: The Universal Laws of Life and Death in Organisms, Cities and Companies
By Geoffrey West
What’s it about?
Differences in scale trip clever people all the time. Not just on Ocado (I’m still working my way through a 35,000 gallon pot of Marmite I assumed was standard-sized), but in physics, time and biology. I wrote more about this here.
What’s the Investment Tip?
When analysing anything, you must account for the limits/benefits of size.
In my world — fund analysis — a great fund manager will stop being great if their fund gets too big: They’ll lose all flexibility; have to own more of a company (which makes it harder to get into or out of a stock without the market noticing and frontrunning you); have to find more ideas; and be forced to buy large caps instead of small caps (scale matters in company choice too).
The Woodford debacle, for example, was down to a very large fund buying some very small stocks. And when Warren Buffett talks about his returns dropping because he now has to hunt elephants, not mosquitoes, the limits of scale are what he’s referring to.
3. Establish good habits (and eradicate bad ones)
Book — The Power of Habit: Why we do what we do and how to change
by Charles Duhigg
What’s it about?
Most of our everyday decisions are habitual, not conscious. The former happen automatically and use the powerful ‘animal’ part of our brain, the latter require effort and willpower and call on the weaker ‘human’ part of our hardware. Understanding the science of this, and then learning to program useful habits and de-program destructive ones is this book’s thing.
What’s the investment tip?
Turn your investment process into an investment habit.
Forcing yourself to go to the gym three times a week is hard, and most of us fail to keep it up. But if you remove willpower as the driver and turn it into a habit, you can keep going for years.
It’s the same for investing: If your process relies on making labour-intensive acts of rational brilliance every week, you won’t keep it up. But if it calls on daily habits, such as regularly checking the quality of your holdings, it becomes simple, painless and can keep working for decades.
For great investors, ‘work’ is no more taxing than completing a daily soduku is for a puzzle fan. They even become twitchy if they *don’t* do it. These investors will thrash those whose daily work requires a huge effort.
4. Don’t rely on economic forecasts to decide how, why, or where to invest
Book: The Most Important Thing — Uncommon sense for the thoughtful investor
by Howard Marks
What’s it about?
It’s a collection of notes written by investor Howard Marks (not the drug smuggler). Most investment notes age less well than milk on a hot day, but the fact that Marks’ ‘memos’ still — 25 years’ later — read well suggests he’s tapped into some timeless wisdom. His book a mix of investment history and guidelines that you won’t help but learn from.
What’s the investment tip?
There are plenty of great tips in Marks’ book, but that economic predictions are worse than useless for investing is a recurring theme. In a nutshell, they’re impossible to get right consistently, and even if you do get one right, they don’t necessarily tell you how markets or assets will respond.
5. Want to beat the market? Then don’t try to beat the market.
Book — Obliquity: why our goals are best achieved indirectly
by John Kay
What’s it about?
If you want to achieve something great, Kay suggests the worst thing you can do is focus directly on achieving that thing. Want to get rich? Or find the perfect life partner? In both cases, focusing obliquely on achieving something else — like creating the world’s best waterproof shoes or mastering your tennis swing — might turn out to be a better way of achieving those goals.
What’s the investment tip?
Focusing on a market is a bad way to beat it.
The best fund managers forget the market and focus on their process. Maybe that’s finding the world’s finest companies, or maybe the cheapest. They focus so hard on it that they get very, very good at it. In doing so, they ignore what’s in their market benchmark, and only add those stocks that meet their standards.
The result of ignoring their benchmark? They beat it. By a long way. While those that obsess about it end up copying it, and produce — at best — dull returns.
6. That thing you’re 100% certain about? You might be wrong…
Book — I May be Wrong: and other wisdoms from life as a forest monk
by Bjorn Natthiko Lindeblad
What’s it about?
Lindeblad decided to become a forest monk in Thailand. This is his story and what he learned from the process.
What’s the investment tip?
Lindeblad learned to recite “I may be wrong” to himself in almost any situation. The result was he made fewer mistakes, learned more, and avoided becoming caught up in damaging arguments.
In other words he learned humility: It’s a trait we investors would do with more of. Pausing before pressing “buy” to thoroughly examine the myriad ways in which we could be wrong about an investment will, more often than not, lead to better decisions and the avoidance of damaging mistakes.
7. Avoid the fragile, seek out the opposite
Book — Anti-Fragile: things that gain from disorder
by Nassim Nicholas Taleb
What’s it about?
You may think the opposite to ‘fragile’ is ‘strong’ or ‘robust’, but Taleb’s book suggest these are only the neutral point on the spectrum, upon which the true opposite to fragility is ‘anti-fragile’.
Your body, for example, is anti-fragile: It doesn’t just respond to the threat of a virus by fighting it off, it also makes you immune to it, preventing any future infection. The book illuminates this under-appreciated theme, and looks at ways we can make ourselves antifragile.
What’s the investment tip?
Finding assets, or creating a portfolio, that not just survive adverse conditions but benefit from them is going to make for a good strategy.
This is why, contrary to all prevailing ‘wisdom’, I use (carefully selected) active managers in my portfolios, not passive funds. They tend to move away from high-flying stocks in the good times (those in which risks are growing), which means their funds perform well when the market mood turns dark and other investors start running for the doors.
Then, amid the chaos, they move from defence to attack, picking up the good stuff others are panic selling. So they’re well set to fly when market conditions improve.
8. De-centralise your investment process
Book — Team of Teams: new rules of engagement for a complex world
by General Stanley McChrystal
What’s it about?
A divisive figure given his day job, General McChrystal led the Joint Special Operations Task Force in Iraq in 2003. Despite vastly superior resources, he realised his giant military bureaucracy was outmanoeuvred by shoestring insurgents who were faster and more flexible.
This is the story of how he retooled that military machine by simplifying communications and decentralising their decision making.
What’s the investment tip?
Despite being avowed capitalists, many investors, particularly in my ‘multi-asset’ world, operate a centralised, top-down decision making model that would make Khrushchev wince.
The best people to decide where to invest aren’t sat in an office in London, they’re out on the ground working their niche. Do I know which assets I should hold in Japan? Or will I even hear about a Tokyo regulatory change, let alone know what to do about it? Nope. But I know some local experts who do, and I trust them to run this part of my portfolio.
9. The best way to make money is not to lose it in the first place
Book: Safe Haven — investing for financial storms
by Mark Spitznagel
What’s it about?
Spitznagel is Nassim Taleb’s (see ‘Anti-Fragile, above) partner in finance. He runs a highly successful hedge fund strategy that protects others’ portfolios against shocks caused by ‘Black Swans’ (the name of another Taleb book — a black swan is a completely unforeseeable event that could wipe you out or, if you’re the right side of it, make you a fortune).
In this book he looks at the art of defending a portfolio against all that markets and life can throw at it.
What’s the investment tip?
It’s amazing how few investors pay enough attention to defence. Yet it’s a mathematical fact that if you lose 50% on a stock, it needs to go up by 100% just to get back to where you were. So why not just avoid the 50% loss and go straight to the 100% gain?
If you figure out how to do this reliably, let me know — it’s harder than it looks. But Spitznagel’s voyage through the pros and cons of various defensive assets and strategies is a good place to start.
10. Take a holistic view of your portfolio
Book: Thinking in Systems — a primer
by Donella Meadows
What’s it about?
Life is full of systems: Your body is a system. A forest is a system. A company is a system, as is a market. So it stands to reason that figuring out how systems work is as close as you’ll get to becoming Neo at the end of The Matrix — the bit with all the green ones and zeroes when he learns to see the source code of everyday life.
Meadows’ book walks us through simple systems through to complex ones, highlighting common features, bugs and shortcuts along the way.
What’s the investment tip?
Treat your portfolio as a system, that’s full of other systems, that lives within a bigger system.
By that I mean, it’s no use just analysing, say, companies as simple, individual entities. The best investors understand their internal complexities, as well as the external risks and opportunities they face. They also consider how they might interact with other stocks in their portfolio, and what they collectively add up to.
But don’t stop there: Their fund holders, their boss, the press and regulators will all react to what their portfolio does, so they build them into their ‘system’ too. They themselves are also a key component: A manager’s own physical and mental health will have implications on their decisions and therefore their performance. Any one of them could break their fund, so they’d be foolish not to consider them.
No one said it was easy…
On this final book, part of the reason I’m so keen to help the Fairfield Enterprise charity is because, if your aim is to improve the system that is British society (and why wouldn’t it be?), then Fairfield Enterprise is pressing on a ‘leverage point’ that might help that happen.
Don’t know what a leverage point is? You should. Thinking in Systems will explain all.
Hopefully some of those have tickled your fancy. If they have, please consider buying them through the Billion Dollar Book Club. Even if it’s 50p more than Amazon: It’ll give you that warm glow that only comes from doing the right thing.
Thank you!
Simon
*I’m sure there’s a better way to do this but I’m too busy to figure it out right now. If you’re tech savvy and can suggest a good way to do this that will take LESS work, I’m all ears!
**Yes, I have already apologised to the ever-generous Stacy Havener for all but stealing the name of her excellent podcast (Billion Dollar Backstory — check it out). What can I say? It was for charity and I dug the alliteration.
