Self directed investing is an interesting journey. I struggle to write this article as the “interesting” journey was not a fun one at all. The old cliche “there are ups and downs” barely scratch the surface of investing with confidence.
As I get more and more requests to teach investment, I realised I keep repeating certain concepts for people who wants self directed investing. These concepts can be summarized into the 5 key principles. These 5 key principles separates investors from speculators.
This article will be more crucial to those who wants to focus on investing rather than speculating. If you thinking of speculating the market, this article may not be beneficial to you.
Disclaimer: The example shown below are not and should not be used as a buy/sell recommendation.
#1: First Principles
I learnt about First Principles from Elon Musk. This term was coined over 2000 years ago by Greek Philosopher Aristotle. Basically, first principle is a basic assumption that cannot be deducted any further.
One simple question that I ask people is what constitute a good company/instrument to invest in? I’m always met with weird stares and raised eyebrows because the answer is typically the flavour of the month. It used to be Cloud, then Electric Vehicles or ESG investing in the recent years. Metaverse is probably going to be a typical answer in the next few quarters.
While they are not wrong, it says nothing about the companies’ underlying business.
When you do self directed investing, you want to find companies’ whose underlying business have a certain advantage over others (otherwise coined as economic moat). This business have to exhibit certain growth potential in the years ahead. If you can’t find a business with an advantage over others, why invest in this business? If you don’t see a growth potential in this business, why risk your money in this business?
When you break investing into First Principles, it becomes easier to understand. However, it takes time to understand a business and it also take time for the company to grow. Ask yourself, are you spending enough time understanding a business and allowing it to grow?
#2: Learn The Language Of Money
I remember asking for directions to a famous bakery in France and it didn’t go well. A kind hearted gentlemen (at least I believed he was) asked if I wanted some pain. I will leave it to you to imagine how scared and confused I was. Anyway, pain means bread in French.
You see harmless jokes like these appearing at random times in our lives. We laugh about it because it don’t really impact us that much. However, it is very different when it comes to the language of money. It WILL hurt when we misinterpret this language.
The language of money in investing is basically accounting. Doing self directed investing without learning about accounting is basically suicide. While you don’t need to learn every single word in the dictionary to understand a language, you will need a certain basic level of grammar rules, vocabulary and sentence structure.
This also takes time to understand but it can be learnt quickly especially if you have a trainer or a teacher who can explain to you what the more important jargons are.
#3: The Wait is as important as the investment
In the era where everything can be obtained in a snap of a finger, the wait is especially difficult. Amazon’s Prime Now, our 4G internet connection, 24/7 island delivery has made things more convenient but has altered our expectation of waiting. We have to relearn how to wait.
“The stock didn’t move much.” (In 2 days)
An extreme example of a company that “didn’t really move much” is Microsoft. Microsoft is now the biggest company (by market capital) in the world right now. However, it went through decades of underperformance until it finally bore fruit for investors. Even if you have invested at the peak of the dotcom bubble until now, you would have average a CAGR of 9%.
Thankfully, not all companies are as extreme like this. That being said, we need to relearn how to wait.
#4: The Price To Pay
In business, everything has a certain value or worth to it. I plan to write an article on property prices in Singapore very soon as I note that there are more and more Million Dollar HDB flats in Singapore. Who determines the prices? The buyers? The sellers? The property agents?
The “smart” answer in this case is the market.
Even though the market determines the prices, it does not mean you need to accept those prices. You on the other hand have 3 decisions to make. To buy, to hold or to sell.
The market prices changes every single day which gives an opportunity to buy at a price that you want. Being a self directed investor, it is important to decide what is the price that you are willing to pay for the company. The danger comes when you are overpaying for the company.
#5: Seek Other Experts
We specialise in certain topics at a very young age of 16 to 21. We go to polytechnic and/or university and are required to take a certain discipline that we will be sticking to for at least 3 years. We then proceed to the workforce and work on that role for a good period of time.
For me, it was finance and economics. While I’m celebrating my decade in the financial institution I’m representing next year, I’m always reminded (especially during COVID-19) that I have little or no knowledge about pharmaceutical companies.
To understand these pharmaceutical companies such as Pfizer and Moderna, I would have to ask experts in those fields if I ever would want to invest in them.
For self directed investors, it is crucial to reach out to other experts (or a community) especially if you want to find out more about those companies. These experts will probably know one or two things more than you do and that would make or break your investment decision.
Being a self directed investor gives you a lot of control but you have to learn how to control it. It will take both time and effort. Are you prepared?
Are there any other principles you feel should be included? Let me know in the comment below.
Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.
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The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.