The older I become, the more I become aware of the mistakes I made early on in my investment career. The biggest mistake, possibly the biggest, was taking the advice of well-known investors too seriously.
By this, I mean I took the advice of investors such as Seth Klarman (Trades, Portfolio) and Warren Buffett (Trades, Portfolio) and put that into a rigid framework without considering my own limitations and psychological traits.
What I have since learned is that there are many ways to make money. One does not have to use the same strategy as other investors to get rich. What matters more than anything else is having a process that one is entirely comfortable with. If not, it can lead to mistakes, knee-jerk reactions, missed opportunities and, of course, monetary losses.
Buy what you know
Understanding and coming to terms with this principle is an integral part of the investing journey. Every single investor is different. Every investor has a different circle of competence, and every investor has different psychological makeups. These are just facts of life that can't be avoided.
This is something Charlie Munger (Trades, Portfolio) has written and spoken about at length in the past. He's said that every human has individual psychological traits, which can be developed and refined, but they can't be removed. This means some people have a "business mind," as Buffett once said.
That doesn't mean one can't make money in the market. It's still possible, though one might have to adjust the strategy, either using a passive style or advisors. But what matters more than anything else is understanding where strengths and weaknesses lie. Only then can an investor deploy their capital effectively.
Without understanding one's own psychological weaknesses and strengths, investing is effectively like playing baseball in the dark. One might be tempted to swing at every opportunity, but it won't be easy to establish where these opportunities are, so the only way to be successful is through sheer luck.
Investing in 2020
This brings me to the current market. 2020 has been a challenging year for investors. Not only did we see one of the most aggressive bear markets in recent memory, but we have also seen one of the most aggressive bull markets.
The market has rallied to new highs despite the economic carnage brought about by the coronavirus pandemic.
Some sectors have produced outstanding returns in this environment, particularly the technology sector. Companies such as Airbnb (ABNB, Financial) have seen their valuations triple in just a few short months.
Naturally, following these gains, some analysts have claimed a bubble is in progress.
That may be the case, but these performances may reflect the new normal. Without the benefit of hindsight, it is impossible to tell.
The best course of action for investors is to follow the same playbook that proved fruitful earlier this year.
In the March selloff, it was difficult to tell what the future held for the global economy and stocks in the near term. However, there is never a perfect time to buy a stock. Trying to predict the future for markets is pure folly.
Therefore, in any market environment, one has to concentrate purely on understanding the business and one's own valuation. Put simply, if a stock looks cheap, it could be a good idea to buy it. If not, it might be best to avoid it.
This is why it's essential to know where your limits are when investing. If an investor has a good understanding of the technology sector right now, they might see some fantastic bargains. But if an investor does not understand tech, there's no shame in staying away.
A bubble may or may not be in process. That doesn't mean all companies are overvalued or undervalued. Unless you are within your circle of competence, it's going to be very difficult to tell.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett: Why IPOs Can Be Painful for Investors
- Case Study: The Fall of Rick Guerin
- Why Value Investing Is Like Buying a House
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
