5 Reasons to Doubt My Analysis
1. Your investment framework differs from mine.
It’s perfectly fine for investors to have investment frameworks that differ from each other. Though I'm a huge critic of day trading, I find it beneficial to approach investing with an open mind so I can take in varied perspectives and use them to “innovate” my own. Due to his huge reliance on psychology in his day-trading success, I was compelled to read "The Inner Voice of Trading" by Michael Martin. This summarizes the underlying philosophy in the book:
"To succeed in the stock market, a trader should aim to understand his inner voice and find a trading system with which his psychological make-up is compatible."
Psychology plays a huge role in investing. Michael Martin again summarizes it well:
“Unfortunately, most aspiring traders find out far too late that the act of trading is 20% intellectual and 80% psychological.”
For this reason, individual investors often have slightly different approaches to investing, as they should. “It’s a complete fallacy to think that having a trading system will annul strong emotions,” Martin says. Therefore, individual investors should cater their investment framework to their psychological make up while still demanding rationality.
Does Michael Martin sound interesting to you? Check out my book review of "The Inner Voice of Trading."
2. Your level of conviction differs from mine.
Even if you manage to buy a stock at the same price as your favorite guru, your level of conviction regarding the pick probably differs immensely. This will, no doubt, affect your sell decision down the road and could end up costing you some serious money.
3. Your circle of competence differs from mine.
I have trouble understanding many companies. In fact, sometimes I feel stupid compared to other financial bloggers and securities analysts out there that so easily hold opinions regarding such a wide range of stocks. My knowledge is very, very limited and I am completely clueless regarding the sustainability of many different business models and industries. Stay within your circle of competence. If you don’t understand where cash is coming from, how management uses it to create value and how sustainable this stream of cash flow is, don’t invest in it — even if your favorite guru thinks it’s the hottest thing since Google.
4. Your time horizons differ from mine.
I could probably say that most value investors are long-term, buy-and-hold investors. But this does not mean we are all investing with the same time horizons in mind. An investor with only $30,000 to invest probably has a drastically different time horizon than someone with $5 million of discretionary cash, whether they realize it or not. What exactly is long-term anyway? Five years? Ten years? Five years is quite a bit different than than years. And even if we say we have a particular time horizon in mind, is that really our time horizon? Take a look at your portfolio turnover. Does it really look like your investment time horizon is greater than five years?
5. I make mistakes.
I make mistakes. In fact, I make huge mistakes. It’s part of investing in the stock market. Even if I’m making money, good outcomes do not mean that the underlying process to achieve these returns was a good one. How much risk did I take to achieve above average results? Was I lucky? Or, on the other side of the coin: When a guru does not have successful outcomes, it doesn’t mean he is a bad investor. Perhaps his process was nearly flawless and he has simply witnessed a bad string of luck. No matter how much we wish our success and failure was all dependent on skill, it’s just not the case. Luck plays a huge role in investing.