I began my full-time investor career path while in college between 1988 to 1992. From time to time, I find myself struggling to shed some of the bad habits that get in the way of maximizing my investment experience. I think a lot of investors can sympathize with these problems, so I decided to make a top ten list of rules to follow for those that are thinking about becoming a full-time investor. Hopefully, this will help you learn from my experience.
1. A Full-Time Investor Finds An Investment Style That He Can Connect With
In the world of finance, you are going to have advice coming at you from multiple directions. Every full-time investor (including me) has an opinion on the best strategy to implement to make money in the stock market. Some of your choices may include:
- day trading using technical analysis
- fundamental investing
- long-term vs. short-term investing
- value vs. growth strategies
- P/E ratio vs. EBITDA ratios
- 52 week highs and lows
- long vs. short
I initially chose to be a growth + value as a full-time investor in the micro-cap/small cap space using price to earnings ratios as my valuation tool. I defined my holding period not by time, but by when a stock attained my price targets.
Remember, it takes time to perfect a craft, so the earlier you can find your investing passion, the faster you will find success. In the book, Outliers, author Malcolm Gladwell concludes that it takes ten thousand hours to master a skill. That works out to about three and a half years, working eight hours every day including weekends and holidays! If you took weekends and holidays off and a standard two-week vacation, it would take you just over 5 years of work. That also assumes you are going to be 100% productive and loaded with Red Bull when you are working. I have been investing for 30 years and I am still learning.
2. Reality Check
The good news is that Malcom also concludes that skills can be learned:
One fascinating point of the study: No “naturally gifted” performers emerged. If natural talent had played a role, we would expect some of the “naturals” to float to the top of the elite level with fewer practice hours than everyone else. But the data showed otherwise. The psychologists found a direct statistical relationship between hours of practice and achievement. No shortcuts. No naturals.
Still, you need to able to handle the stress that comes with making your living by investing in stocks. You can’t be afraid to lose money. Your emotions will be tested, that is a guarantee. Sometimes you will be enticed to take unnecessary risk to make money and at other times you may make an emotional decision to avoid loss when markets are crashing. Fear is your worst enemy – it can paralyze investment moves. It’s human to succumb to emotion, but how will you respond in the aftermath of a devastating scenario? Investing in stocks may ultimately not be your calling.
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.”
– Peter Lynch
3. Passion, Passion, Passion!
Staying with Malcom:
“The elite don’t just work harder than everybody else. At some point the elites fall in love with practice to the point where they want to do little else.”
I still get a rush when I enter the “research zone.
Early in my career, all I did was research companies and call management teams. My office was a dungeon with no windows and no distractions. Even when I worked at The Vanguard Group – right out of college in 1992 – I would use my lunch break to call companies. I still recall when ex-CEO John J. Brennan walked into a conference room with other executives while I was eating a salami sandwich and interviewing a company.
When the memo went out that we could not use phones in conference rooms, I used phones on the “work deck”. Eventually, all phones on deck were off limits. I am pretty sure they were happy to see me leave in 1994.
I can’t totally define why I love what I do – it’s simply my passion. This next point is very important. When I began investing, money was not my obsession. Money has a funny way of finding you when you do something you like that you are good at – so don’t be a full-time investor just for the money. Do it because you like it.
I hate to be harsh, but if you don’t have the passion and drive to be a full-time investor, you are probably better served finding your passion. That does not mean you should not invest or learn about investing, but choosing the right career path is a big deal. Chances are if you are reading this article, you have the required passion.
4. Finding Your Strategy
When it comes to connecting with an investment style, I was really lucky.
My dad dabbled in the stock market and while in high school and college, and I would spend 30 minutes in the evening with him watching Nightly Business Report on PBS hosted by Paul Kangas, as he summarized the day’s stock market action.
My dad would spend a fair amount of time reading press releases, looking for growth companies to invest in. My inflection point came when he gave me “One Up On Wall Street” by Peter Lynch, to read. Peter Lynch’s ability to simplify the investing process resonated with me immediately; so much so, that I decided I would not read any more books on investing until I really honed my skills.
So, what do you do if you don’t happen to be as lucky as I was? I suggest making a list of books and research sources to start looking at. It’s important to identify both your strengths and your weaknesses. Since I am a fundamental full-time investor, I feel comfortable listing some sources you can check out. Hopefully one or two will resonate with you.
Books About Investing Theory
- “One Up On Wall Street”, Growth + Value Investing
- “The Intelligent Investor”, Value Investing
- “Good To Great”, What Makes Management Teams/companies Great vs. Good
Research Tools to help you investigate the fundamentals of companies and gain an investing advantage
- Value Line either by going to valueline.com or visiting your college or local library.
- Standard & Poor’s Tear Sheets. These are tougher to come by. You will probably have to contact a broker to get these sheets or subscribe to a service that has them.
- Quarterly and Annual reports that contain CEO Letters to Shareholders (not to be confused with SEC 10K & 10Q filings) – You can find some of these reports at Nasdaq, but for smaller companies you are probably going to have the company you are interested in send you the report.
- SEC Filings. One of the best sources for identifying information arbitrage opportunities consisting of intel that management teams have not revealed in press releases.
- Conference call transcripts at Seeking Alpha. Another great source for identifying information arbitrage opportunities.
I am a true believer that too much information is not always a good thing. Once you find your investment calling, stick with it for a long time. Stay hyper focused resisting the urge to seek out alternative options when you hear other investors bragging about success using their strategies; it’s what they may be good at. There will be a time when you can experiment with leaving your comfort zone to gain more alpha. Also, don’t be distracted by the media, who is tasked with the job of scaring and distracting you – that means tuning out CNBC.
6. Simplify The Process
U.S. exchanges and over the counter market contain over 20,000 stocks – this is why focus is so important.
Early in my career, I started the simplification process by concentrating on small caps and microcaps that hit new 52 week highs or lows. Next, I whittled the universe down by looking at stocks that traded under $25.00 with shares outstanding under 25 million that met certain valuation parameters. I omitted industries such as banks and resource companies that I did not fully understand or that were impacted by highly unpredictable dynamics.
I continued this process along with the aid of SEC filings, annual reports, press releases and management interviews. As I became more efficient at investing I had fun, mixing up my research starting points. I didn’t care about what I was missing; I instead tried to concentrate on what I knew I could be most efficient at. Maybe some of the metrics I’ve ignored in the past could be where your opportunities for research lie.
7. Test Your Skills
If you have the chance, I highly recommend entering investment challenges to put some pressure on yourself to see how you function when the heat is on. Try to stay as close to your investment strategy as possible, avoiding risk that you would not take in real life.
8. Find A Mentor
Nothing can replace sharing real investment experiences alongside a successful full-time investor. Look for someone who has his/her ego in check and is willing to share it all with you. It is also important that your mentor’s strategies are aligned with yours. Looking back now, my mentors were my Dad and Peter Lynch. I suggest using twitter, reading blogs and attending investment conferences to meet like-minded investors you can learn from. Don’t be afraid to join a few investment newsletter sites that have a good reputation not just for handing out stock picks, but are not afraid to teach you what they do. Many people who work at GeoInvesting were my past students. If you want to hear what I have to say once in a while I occasionally host a radio called The Everyday Investor with episodes posted at my blog, Maj’s Equity Strategies.
9. Define Your Sell Discipline
Lack of sell discipline is where many full-time investors, including myself, have momentary lapses in judgement. We tend to fall in love with our positions whether they go up or down. For me, it’s been my biggest area of needed improvement. Do you define your investment strategy by time or by value? This is a hot button for me that I will discuss in another article. But let’s assume you have set price targets for your holdings, regardless of time. Here are a few sell discipline options:
- Sell your entire position when it reaches your price target
- Slowly sell out of your position as a stock approaches your price target
- Sell a bulk of your position at some predetermined price and let the rest ride to your price target
Don’t forget to reassess your price targets if the prospects of the company you have invested in have changed. Be aware that your brokerage firm’s commission structure can impact your profits. For example, does your firm base its commission on a cents per share basis or per trade?
I discuss different sell disciplines at GeoInvesting.com.
10. Manage Your Life Efficiently, Manage Your Margin
As a full-time investor your income will be dependent on highly unpredictable cash flows in the short-term. Make sure you adjust your sell discipline to your lifestyle. Spend the early years of your investing career by building a nest egg you can lean on when times get tough. This is especially crucial if you use margin to buy stocks as I do, although I don’t recommend it. I used real estate I accumulated as my portfolio grew as my backstop to raise cash during the 2008 financial crisis. But I wish I had done a better job “stock” piling some cash while using less margin. I still struggle with some of these decisions. If you want to consider using margin here are some scenarios that may be appropriate to put on a little more risk:
- Shorting a stock you know is a fraud, especially if you plan to write a report supporting your opinion
- You are very confident that a stock you are holding will be acquired. See these articles we wrote about MKTG when it was trading at ~$8.00 and clues why we thought the stock would be an ideal acquisition target, if not almost guaranteed (it was taken out 10 months later at $27 per share).
- When you are working with a limited amount of capital and desire a little more diversification.
Odds Are In Your Favor
Now I am not saying that everyone can be a great full-time investor. But, luckily you don’t have to be a great investor to be a successful investor. Just keep getting better and better. You guessed it, Peter Lynch said it best:
“If seven out of ten of my stocks perform as expected, then I’m delighted. If six out of ten of my stocks perform as expected, then I’m thankful. Six out of ten is all it takes to produce an enviable record of Wall Street.”
There are not many careers where you can excel with those odds. So shoot for being successful, and great may come with time. You just might get there. With some hard work the odds are on your side that you will make lots of money along your journey.