I have thought a lot about this scenario: If somebody who essentially relied on a coin toss before every trade makes a great return and told me to follow his method, would I take the advice and implement it? Using a coin toss as an investing strategy doesn’t sound very logical or robust, does it? But does how a strategy sounds really matter when there is a return to back it up? If somebody else had a lower return using a more sophisticated method, would you still opt for the higher level of sophistication or for a coin toss?
I have never been a great believer in cryptocurrency or Bitcoin in particular. But in 2020, I had an inkling that as Bitcoin was trading around $4,000 per coin, it was a great entry price and I would make a significant profit. Yet, I didn’t act on it because trading without knowing the fundamentals of the asset isn’t my thing. Needless to say, that mistake cost me a lot. If investing in cryptocurrency yields a great returns, does it really matter whether you understand Bitcoin and why its price goes up or down? If somebody in November 2020 bought, say, 5 Bitcoins at $4,000 by simply tossing a coin, how could I criticize that method when my return is so much lower?
I have seen a lot of people try to be clever, diligent and sophisticated in picking stocks with multiples, DCF and all the fancy ratios. However, if a higher level of sophistication is required for a successful portfolio, why do we keep hearing experts say that it’s better to invest in indexes? In an experiment cited by this episode of Last Week Tonight With John Oliver, some professional stock pickers were pitted against a cat. The result? The pros had a 3.5% return, dwarfed by 11% return of the cat! I have my own personal example on this too. I usually invest time in understanding a company before purchasing the stock. However, one of my most profitable trades is MongoDB, which came from a friend’s tip and for which I didn’t do much due diligence before taking a position. I was thinking: well, I trust my developer friend and let’s use this as an opportunity to see what return I’d have with virtually little study into the company. Over the same period of time, my position on PayPal, which I spent a lot of time studying and even wrote about, hasn’t delivered as high a return as my random bet on MongoDB. But then you may ask: well, in the long term, PayPal is a better bet than MongoDB. And that’s what makes investing so challenging.
To me, investing is a combination of art and science, and it’s more of the former than of the latter. There are a lot of questions that aren’t easy to answer. How could you tell if your investing method works? What is the comparison yardstick? If you take inspiration from somebody else, how can you know that the borrowed method would work? If your investing horizon is long-term, how far in the future is that long term? Do you have the temperamental and psychological make-up to resist your temptation and urges? If a position is ruined by a force majeure, will you still have confidence in your ability and strategy? Will you give yourself a pass because the failure is caused by an unexpected event? Or should you get some blame for failing to apply some risk margin to your decision-making?
I think about those questions quite often and while I don’t have concrete answers, it doesn’t bother me. It’s part of the game and the difficulty as well as the uncertainty are what make it so exciting. I am sure there are thousands, if not millions, of investors out there that have a better return than I do. That’s fine. As long as I learn more about myself, improve during this investing journey and receive a sense of fulfillment, even though I can’t put a number on it, that is enough.
3 thoughts on “Investing is hard”
I wouldn’t put that much faith in DCF analysis. Considering the amount of assumptions that go into picking the numbers to use in the calculations, there is no way they can that accurate. Even if you are able to come up with an accurate valuation, that doesn’t mean the stock price will reflect that valuation any time soon. I read somewhere that it’s hard to know when someone is a great investor because it takes a really long time to see their true results. In any case, I completely agree with you; investing is hard.