You want to invest in stocks?
Then read this Tour de Investing from a perspective of a retail investor.
(This is no financial advice.)
It is early July ‘22. On Tour de France, the most prominent multiple-stage bicycle race, the riders just completed stage 5 out of 21. We are a couple of months into bubbles bursting. Puf and it’s gone. The times of cheap money also gone; nobody knows what is coming. But this is a timeless essay, so here is a
warm welcome to Tour de Investing! 🚴🏻
We will explore the multi-stage evolution of a regular retail (=amateur) investor, small time fish, fortunate enough to have savings and live somewhere safe on this planet.
But, hold on, what does Tour de France have to do with Tour de Investing? Well, both have multiple stages, are brutal, hard to win and many don’t make it. But luckily, Tour de Investing allows skipping the stages. Unfortunately nobody laid it out to me in plain text 8 years ago, but, taking it positively, at least I had the privilege of learning by doing. Before we dig in, some context:
Stock picking is mostly a male
activity, because women are more risk averse (contested!) and probably more reasonable. Wait. Could it be that active investing is just gambling for (affluent) men who look down on sports betting and casinos? Possible! See, stock pickers love to pull out their phones and look at charts several times a day, because we are addicts. Active investing is an Ego thing; no wonder better-than-market returns are called ‘alpha’, alpha returns for alpha males.
And it is easy! In bull markets when everything goes up, everyone is a genius. Money making money; plus you can discuss stocks, crypto and other ‘next big thing’ ideas with your buddies. Retail investing exploded thanks to the apps like Robinhood, eToro or Coinbase; they gamified investing — you buy and sell with a tap! Ah, and if you ALSO do sports betting, or even worse, online casinos, you probably need help.
Stock ownership is still much higher
in the US (58%) compared to Germany (17% or 23%, depends where you look) and most of the Europe. Also because Americans approach retirement savings differently and we had some really shitty experience with IPOs. For example, Deutsche Telekom had three IPOs before dot-com bubble; stock was actively pushed to the general public and is still around 80% down from the top. In Slovenia, a 2007 IPO of NKBM, a bank, produced over 100k bag-holders in a country of 2 million.
Plebs got burned because history rhymes? No shit. Naturally people got defensive and many never touched stocks again; no wonder continental Europe is somewhere between 5 to 10 years behind the US in terms of access and especially cost. In Germany, for example, it is not unusual to pay 5-15 EUR per order. Or as Mark Hanna would say, “… cold hard cash, via commission, mother—”
I have watched this clip at least 50x
and have read above average amount of investing/money management books and papers. You are still reading this, so I assume stocks and investing crossed your mind too; it’s almost mainstream but will get less popular in a bear market. As two regular small fish, we probably only have two options:
Option 1: invest a lot of your free time: study the matter, develop a process and hope it is any good, or
Option 2: just buy ETFs and forget the charts.
But before you decide: Never forget that even professional money managers rarely outperform the market. Yeah. Still wanna do stock picking?
Ok, so be it, let’s try stock picking!
This choice is almost always taxed and the question is only how much will your mistakes cost you. It is the natural evolution of an alpha wannabe, thinking, “I can do it!”
Finally, let’s see the stages of our Tour de Investing. Don’t forget: as opposed to Tour de France you get to choose which stages you do! I did some myself. How about you?
Stage 1: Chart looking guy.
”It went down a lot, a buy.”
”It went up a lot, oh, looks expensive.”
Stage 2: Chart looking guy, but with friends.
Pointing out ideas. Someone mentions great opportunity in Africa, Kazakhstan, Bulgaria or a penny stock. Or that new ICO/DAO/Coin/big words thing.
”Look at this, man.”
”Ok, I am in!”
Stage 3: Look for inspiration online.
Seeking Alpha, Stocktwits and other similar places. Bonus points for reading the Economist, Handelsblatt, WSJ or Bloomberg. Some newsletters too!
Also buy stocks that everyone talks about, because why would you wanna miss out on the fuel cell or the cure for Alzheimer’s?
Stage 4: Buy subscriptions to services.
But not from Warren Buffett or Jim Simons. Because why the fuck would someone sell a service for a regular Joe if they made so much money themselves?
Motley Fool, Forex signals, a thick-watch-guy-with-a-Lambo on Insta? TikTok?
”Sure, a great idea.”
Stage 5: Discover balance sheets, income & cash flow statements.
Ok, getting there! Makes sense.
”Now I get it!”
Probably you don’t, but cute.
Stage 6: Read a book about investing. Then read more books.
Huhu, you really are on fire. P/E and PEG. But did you take notes?
Be aware these books are written by professionals, who did it professionally and you cannot just “call the management”!
Sure, Baron Rothschild, it is easy to buy “when there is blood in the streets” if you are already a millionaire, hue hue hue.
Stage 7: Aswath Damodaran and DCF.
Somehow find the time to do his valuation course. DCF models, you king/queen, almost there. Ah, you did it in school already? Good for you!
Wonder “where did he get this number from?” a lot.
Also, how much trust do you have in your numbers? 1-10? Be honest.
Stage 8: Machine learning on stocks.
Because you talked to a Data Scientist or you are a Data Scientist.
Think, “it could work on stock market.” Additional points if you just completed a data science bootcamp and think of doing algo-trading.
Stage 9: Stop reading articles of randos on Seeking alpha & elsewhere.
Closely connected to the stage of reading good books. You start recognising majority of randos have no fucking clue.
”I could have written this crap, but better.”
Stage 10: Become a Seeking Alpha author.
Pick a fancy name like “something Capital” and then write “we think” while trying to push your one-man-band service. Bonus points if your research only includes popular stocks. Plot-twist: you make more money with the articles than with investing. You win!
Stage 11: Sign-up/use Twitter for FinTwit.
Go on Twitter, FinTwit is the place to be!
Direct access to smart people, this could be it, lads!
Stage 12: Get access to options.
Read too much r/wallstreetbets.
Think you are smart and buy puts on S&P500.
Greeks? Who cares, really complicated.
Stage 13: Think about becoming a day trader or “do this for a living.”
Lol, get the fuck out.
You were just lucky a couple of times.
Stage 14: “Why the fuck did I read r/wallstreetbets?”
Stage 15: "Basically I am selling insurance."
Ok, genius, you discovered r/thetagang and sell covered calls and cash secured puts. Mabye maybe maybe.
Stage 16: Unfollow 3/4 of the FinTwit.
Realise that some accounts are just Seeking Alpha in disguise.
Realise that Warren and many others are not really tweeting much. Guess why? Probably they study some shit while you are scrolling…
Stage 17: Earnings conference calls.
Start reading and listening to conference calls of the companies you own or want to own. Realise that some professional analysts are idiots too.
👑 Royal Stage 18: Epiphany of Complexity.
Finally realise how extremely complicated investing is. Risk capital, 10y yields, interplay of growth, margins, expansions and deflations of P/E ratios, secular trends. Macro. The need to be right a lot, but also simplify correctly.
Stage 19: Listen to podcasts and interviews with famous investors.
Ok, but do not forget that what they said about the markets on the 25th of June means nothing 3 weeks later, because they, and the extremely smart analysts they employ, probably moved on already.
Stage 20: Fuck all of this and my ego.
These are the three possible results:
”I am just gonna buy ETFs.”
”I am just gonna give my money to someone to take care of it.”
”I never touch stocks again.”
Did I miss many things? Probably. But in general remember one thing: Better be a smart gambler, or no gambler at all.
Cynical jokes aside, here are some suggestions:
if you think you are not really a stock picker or are in general wondering how to manage or think about your money, I warmly recommend Morgan Housel’s Psychology of Money and Nick Maggiulli’s Just Keep Buying. The later has one or two US specific chapters, but still has great takeaways.
If you still want to try yourself with stock picking, Prof. Damodaran just recently brilliantly explained how it all works (yeah, it is just about risk). But before you dive in all the literature I also recommend to read why you should not do it (the same Nick as above).
Investing is hard, and to even have a shot at success as a small fish, you really need to enjoy the hard stuff or just be extremely lucky. Even the ‘no-brainer’ ETFs could ultimately disappoint, the same as your house could burn down. At the end is about the risk you are willing to take. Good luck!
Thanks for reading until the end, I really appreciate you taking the time. If you learned something or liked this post, please do me a BIG favour and hit the “Like” button or leave a comment.
You can also say hi on Twitter.
have you read the chapter about Chris Camillo in The New market wizards book? It explains a documented way a regular guy beat the market without fundamental of technical analysis. I know this sounds like some spam bot pushing a scheme or crypto but it seriously is real. He looks for trends in consumer products usually and sells when the street understands. Examples are things like youtube stars pushing elf cosmetics and the analysts not know about that and miss the move in the stock
I left the same tracks in the sand........brilliant analysis, looking forward to more of your astute observations!