By Vitaliy Katsenelson
College graduation ceremonies this time of year remind me of my own graduation from the University of Colorado in 1997.
I felt completely lost, with no idea what to do next. Now, more than 20 years later, I can offer some experience-based advice about investing and how to go about it realistically. Here’s what I would tell my younger self and his generation:
1. Find yourself. Investing is like a piece of tight clothing: Just because it fits and looks good on someone else doesn’t mean it’s a good fit for you. Your investment strategy has to fit your personality; it has to wrap around your biases and life experiences. You’ll only discover your strategy, the one that fits your personality, when you start putting real money to work.
2. Just do it. The best way to learn about investing is by doing. Don’t create paper portfolios. Take as much money as you can afford to lose (because you may lose it), and invest it. The most difficult part of investing is staying rational when you get punched in the face by the markets. Understanding the emotions that losses and gains evoke in you and dealing with them is incredibly valuable.
Don’t focus on building a properly diversified portfolio. Your initial focus should be stock analysis, not portfolio construction. You simply won’t have enough time to do the deep research necessary to build a diversified portfolio of 15 to 25 stocks. At this point in your career, depth is more important than breadth.
3. Invest, don’t gamble. Do the analysis with the diligence and care that you would bring to investing your parents’ retirement savings. Document your research. Imagine you are working as an analyst at a mutual fund and writing a pitch for a stock to a portfolio manager. You’ll learn a lot from documenting and writing up your research. This will keep you rational.
Browse investment writeups on ValueInvestorsClub.com . This website was started by Joel Greenblatt — a terrific investor who wrote “ The Little Book That Beats the Market ” and “ You Can Be a Stock Market Genius ” (both highly recommended). This is where you can learn what the depth and rigor of your research needs to be. Writeups here are posted by diehard value investors, not academics, who put their money where their mouths are.
4. Start with what you know. What stocks do you analyze first? Recently I was asked this question by a fellow who had undergraduate and graduate degrees in aerospace engineering. What do you think my answer was? I said “You probably know more than most people your age about the aerospace industry. Create a map of the industry and then learn about each company in the industry.” It is easier to start analyzing something you already understand.
5. Learn to say ‘I don’t know’. You cannot be expert in everything. Someone who has an answer for everything probably knows very little. Saying “I don’t know” requires honesty and self-confidence, and it opens doors for learning.
6. Make investment friends. My life over the last 20 years has been enriched by having great investment friends around me. Today my investment friends are really just my friends, with whom I share and debate stocks, though we also talk about family, kids, and such.
Investing doesn’t have to be a solitary, sterile journey; in fact it should not be one. Every investor, without exception, will go through a period where he or she feels like a complete idiot — the market will do this to you at times (trust me on this). Surround yourself with loyal, humble investment friends who can give you support, and who are smarter than you, so you’ll always be learning from them.
7. Read. These books have been helpful to me:
• “ Fooled by Randomness ”, by Nassim Taleb, which will make you deeply appreciate the role randomness plays in investing.
• “ Poor Charlie’s Almanac ”, to understand the second half of Berkshire Hathaway /zigman2/quotes/208872451/composite BRK.A -1.30% /zigman2/quotes/200060694/composite BRK.B -0.77% — Warren Buffett’s partner, Charlie Munger.