Have Fun Staying Poor!
Trading - Stock Market - GameStop - Robinhood - Crypto - Big Profits - It Only Goes Up
Hello, I am Nicolas Bustamante, and each week, I write about concepts and methods to build successful businesses.
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The Impact of the Highly Improbable
Surviving Capitalism with Competitive Moats
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I have been pretty aloof to the current frenzy regarding investments. As a basic principle, I try to avoid looking at the news. I wasn't even up to date on the recent phenomenon until quite recently. On top of this, when it comes to investment, I am very conservative. Knowing that almost no one can beat the market over a long period, my strategy is to be a long term passive index investor. I have read so many books about value investing that I'm highly skeptical of any other approaches. Margin-of-safety, risk-adjusted-return, avoidance of extreme variations, no leverage, go against the crowd; these are my mantras. Nothing exciting here, it's very dull.
Then I re-met the real world. A few months ago, I started receiving messages from friends and family about buying stocks and cryptocurrencies such as $AMZ, $TSLA, $LINK, and, more recently, $GME. These messages were from people with no specific investment background, and almost all of them are entirely new to the investing game. These conversations reflect a broader phenomenon. With the indefinite stay-at-home order and the raging economic crisis, many have turned into investing to make a living. There are 13 million traders on Robinhood alone, and the app is number 1 on the AppStore. It all seems crazy to me because, looking at both the total market cap over GDP or the CAPE ratio, we are in one of the most expensive stock markets in history.
I was shocked by the messages. Then worse, I felt the temptation. Today, the atmosphere feels like being surrounded by internet memes yelling, "have fun staying poor." I understand why some of the best investors don't live close to Wall Street. Warren Buffet lives in Omaha, Seth Klarman lives in Boston, Michael Burry lives in Saratoga, Mark Spitznagel lives on a farm in Michigan. It is easier to avoid hanging out with the wrong kind of peers rather than resisting peer pressure. When friends send you screenshots of their gains after margin trading stocks, the temptation to capitulate and join them is strong. Great investors have mastered their psychology over time, but the younger ones don't have such experience. One of the silver linings for me was the experience of the March 2020 crash. It was a good buying opportunity, but most people turned immediately into panic sellers. No more "this time is different," "it's a unique opportunity to buy now," it was just panic. They didn't buy the big dip, and now they are buying the all-time high. Anyway, it's interesting to feel the temptation of speculation. It reminds me of what I wrote about managing one's psychology in How to Beat the Market :
Greed is an extremely powerful force that overcomes common sense, prudence and memory of painful past lessons. It's hard to stay prudent when every speculators around are enjoying significant profits. The combination of the pressure to conform and the desire to get rich cause investor to drop their independence and skepticism which leads to their capitulation by buying into the speculative market. The S&P500's average return from 1991 through 1999 was 20.8% per year. Many capitulated and were crushed by the 2000 crash. Greed is a drug that affects the investor's rational thinking while envy forces investor to comply with the herd. As Warren Buffet says, “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”.
Thanks, Warren! Finally, reading all these investment books didn't exactly encourage me to become an investor but instead gave me plenty of new ideas to apply to my business. Reading about investing in great companies made me bullish about building such business with Doctrine.
Ps: here is a curation of the best books I have read on investing:
The Intelligent Investor by Benjamin Graham
Security Analysis by Benjamin Graham and David Dodd
The Most Important Thing by Howard S. Marks
Poor Charlie's Almanack by Peter D. Kaufman
The Snowball: Warren Buffett and the Business of Life by Alice Schroeder
Tap Dancing to Work: Warren Buffett on Practically Everything by Carol Loomis
The Essays of Warren Buffett by Lawrence A. Cunningham
Margin-of-Safety by Seth Klarman
Common Stocks and Uncommon Profits by Philip A. Fisher
The Outsiders by William Thorndike
Irrational Exuberance by Robert J. Shiller
The Little Book of Common Sense Investing by John C. Bogle
The Incerto by Nassim Nicholas Taleb (all the books even The Bed of Procrustes is good)
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Difficult times to keep cool for sure. I remember a few weeks back a conversation I had with a friend regarding crypto. I was encouraging him to sell at least 10% to start paying back his original investment. He was so busy gloating that he didnt sell and is now preaching about how much more profitable his investment is going to be in the next few years. It is literaly insane to see how much some wanna be investors can make up excuses for past failures.
Have fun becoming poor when your "all eggs in the same basket" strategy will inevitably fail..
If you were to recommand one of the books you mentionned to get started on understanding value building, which one would it be?
The fact that one needs capital in order to make a living trading stocks seems to be lost on those new "traders" or investors. How can you explain the economics of one's income based on low capital any other way than high luck or insane risk taking? There isn't enough awareness in the general population that succesfulf investors have not started their career in a garage like silicon valley's tech moguls, but as employees of big investment firms.
Nicolas have you read any of Ray Dalio's books and seen his recent linkedin post about Bitcoin ?