Discover more from Weekend Wisdom - Dan Isaacman
How To Invest Like a Pro
The Best Investment Advice of All Time
The purpose of the article is to give you a different way to think about growing money. I’m not a financial advisor, and this is not financial advice.
Herein are my personal thoughts.
Part of having control over your mind is feeling safe with the amount of financial wealth you have.
I recently stumbled on what I believe to be the best Investing advice I have ever heard.
“Shut up And Wait”
Let us unpack this 4-word strategy, possibly the best investment advice of all-time.
Defining Your Outcome
There are 3 core tenants to my “Shut Up and Wait” investing principles;
Know Your Time Horizon - As in an investor, I like to think in periods of 5 years as I ask “How Long Am I Willing To Wait?”
Define an Exit Point & Stop-Loss - Assess the Risk and The Reward by defining “How Much Do I Want To Make, or Am I Willing To Lose?”
Measure Yourself by Your Ability to Follow Your Own Rules. - Initially You Can Borrow Rules from Others, But your Key Metric for Each Decision, Whether You Make Money Or Not is, “Did I Follow My rules?”
We will jump into the specifics of the core tenants, but first;
The Psychology of Investing
Before considering the 3 fundamentals of my investment strategy, it is essential to note that the method involves 2 psychological elements.
Having an allocation of money that you do not mind losing
Feeling comfortable and knowledgeable about the investments you make and bets you take
Know that you could lose everything and possibly more. If you invest money that will compromise your living conditions, such as money you need to pay the rent, you will affect your mental health and wellbeing.
It is inevitable at some time when entering markets that you experience a loss of wealth that is realised or on paper. Part of playing the game is being able to stomach the volatility when the markets go against you.
Most investors will see a significant drawdown of their investment, but few will accept this as part of the cost of playing the game.
It is unlikely that you will pick the perfect bottom of a market. It is near impossible to always time your entries and exits to always win. You need to feel comfortable making some losses, and this is why you should only invest money you are willing to lose.
Know What You Are Getting Into
Having knowledge of what you are investing in is the second core psychological tenant.
Most of us have noticed the massive surge of Bitcoin. You could not escape the news articles that try to justify that “you would now be a millionaire if you invested $100 in Bitcoin in 2012.”
This is simply unreasonable logic.
These early adopters would have to have held onto Bitcoin when the price dropped from $4 to $0.50.
Imagine if you only brought it because you thought it would one day be worth $20,000 +. Then, all of a sudden, you lost 90% of your initial investment.
I would likely have moved on and found somewhere else to park my money.
Suppose you understand the fundamentals of what you are investing in. In that case, you are more likely to stick to your strategy and hold on to your investment when others think it is a terrible idea.
Having conviction in the decisions you make are key. When Bitcoin dipped by more than 75% (which has happened many times) the investor had to go back and look at the reasons why they brought it in the first place. If their thesis is strong, and they have a firm belief in their decision, they are likely to weather storm. If their conviction is low, then they likely sold bitcoin when it dropped to $0.5.
Tracking Your Money and Psychology
Before we dive into my 3 Step Strategy, I encourage you, if you do invest, to keep an active investment journal.
In the Trading Journal, you will record:
The exact price per unit when you bought
The amount you spent
A snapshot of the chart/graph, if available
The reason for buying (thesis), and your psychological state of mind
Your intention to sell if the price hits your defined targets.
Bonus Question: What is the opinion of the person on the other side of this trade. Why are they buying or selling?
Your Trading Journal will help you keep track of your trading and investing.
The 3 Benefits of a Trading Journal are:
Your journal will be a valuable place where you can store your rules for trading. I usually store all my rules on the front page
You can look back at the reason why you made certain decisions
You can keep track for recording and tax purposes
Why Did You Buy? Why Will I Sell?
The most crucial aspect of the Trading Journal however, is the reasoning behind the trade.
Using outcome based thinking will help you make better choices.
If you find yourself in an extremely positive and optimistic mood, it is hard to image the exact opposite emotion.
You might feel so confident one day, and then have the complete opposite feeling in 3 months time.
Remember, trading will test you in unexpected ways.
It may push you to your psychological limits. Panic and fear is real when you start to lose money.
If you decide to sell a share, make sure to reflect on your psychological state of mind. Ask yourself, “was I in a better state of mind when I brought in”? This can help you if you are about to make an irrational decision in the future.
When considering selling, it is worth noting that even the best investors lose on some trades.
The best traders are the ones who can win 6 out of 10 trades.
Losing and learning are similar.
Cutting your losses and letting your winners run will keep you in the game. Having a reason why you might sell such as a sentiment indicator may help to make the decision easier if you are forced to sell or execute a stop loss.
- Knowing your Time Horizon.
If you manage to hold onto your investments and get lucky enough for them to start compounding, you realise that the trick is time and patience.
The difference between investing right now and investing 5 years later can be the difference between tens of thousands instead of hundreds of thousands.
When you buy, ask yourself, “How long do I plan to hold onto this investment”. If your time horizon is years instead of months, you will more likely see your money grow.
Being time conscious involves asking, “Will I be okay, locking my money up without accessing it for (x) time?”
The entry price that you pay is not as critical when making longer-term investment decisions.
Suppose the future is any indication of the past (which it may not be). In that case, the general trend of the overall market is a bumpy ride upwards.
- Defining Your Exit Strategy.
What do you want?
Most people get what they want from markets.
At first, this may sound absurd. Why is everyone not rich then? Obviously, that is what we want, right?
At the end of the day, you will be the one making the decisions and choices of when to buy and sell, so in theory, that means that you get what you want.
As long as you have a long time horizon and you are not subject to an emergency that forces you to remove your money, you have the choice and free will to make your decisions.
Defining a number value where you will scale in or out of a market means that you can set your risk/reward before you enter into a trade.
Most people lose money because they did not define a dollar value that determines where they will exit the market.
Be very clear about the selling price.
This will not only make you a more successful trader, but it will allow you to know your risk level.
Your risk is the amount you will be willing to lose.
If you are willing to only lose 10% of your money, you can create a stop-loss order.
Note: When investing it is best to think in terms of percentages instead of dollar values.
If you spent $100 on 10 shares and you have a stop loss (lower sell-order) at $90, then the most you will likely lose is 10%. If you have a sell order at $120, then you stand to gain 20%.
You can often set and forget both of these values simultaneously when you buy.
Knowing your risk vs your reward will help you sleep at night.
If you know your exit price, this can help you through the experience of the inevitable feelings of greed or fear that arise for everyone involved in markets.
Measuring Your Success.
The best measure of how well you are doing is not the amount of money you accumulate.
The metric I prefer is “how well am I following my own rule book?”
When you first start trading, you inherit rules from others.
Slowly you begin to put together your own set of guiding principles (that I encourage you to write in your trading journal).
As mentioned, investing is one of the most emotionally challenging and stimulating rollercoasters of human psychology.
Emotion is part of the game, and trading and investing will likely open the doors to expose your psychological tendencies better than anything I know of.
Here are some rules from my trading journal:
Plan trades, don’t gamble on shares as the house always wins.
Stop overtrading as the fees will add up, and you will end up worse off. Less is more.
Do not chase Hype, but anticipate trends. Where are things going, where is the confidence and psychology of the peoples going to shift towards?
Sell when people are celebrating, but when no-one wants any of it.
Manage trades with no regrets. You are winning or learning.
Do not trade emotions. Don’t make an emotional decision, especially if you made a better decision using a rational mind.
The market does not go up forever; work out a way to make money either way.
Find Your Own Way, and Stick To It.
You should not listen to me, didn’t you read the first line of the article? I am not a financial advisor!
These are only my thoughts on investing, having played with markets for the past few years.
Markets can be highly stimulating, mentally and emotionally. The markets, at large, are the most excellent psychology game you can play.
Markets, in my opinion, are one way to glean insight into the mass psychology of people and their money decisions.
There are always risks when dealing with money, and luck plays a huge role in investing. However, if you follow the 3 core tenants, and you also practice the sage advice “Shut up and Wait”, you just might end up with life-changing wealth that may help you unwind your mind.
If you want to understand your money and cash flow to invest, check out this article about Financial Freedom.