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Ten things I’ve learned from ten years of actively investing

Spot The Investor in his far-flung bunker in early 2004

Back in late 2003, I decided I wasn’t ready to gamble all my savings1 on what seemed to me to be a crazy house price bubble.

Instead, I decided to invest most of my money in the stock market.

Given my woeful misjudging of London property prices (they went on to double) I’m probably lucky I fancied myself as a stock picker rather than a real estate tycoon.

Here are a few lines from the investment diary I began at the same time:

“I think that we are about to see the market tick up again. I think terrorism is priced into the market, that after three years the worst is over, and that now is a good time to invest, particularly for the long term. I can’t keep writing ‘touchwood’, so assume that’s a standing thing for this entire investment log!”

I intended to be a pure tracker fund investor – pretty radical back in 2003.

However I did also buy some experiment blue chip shares for income, and over time these and later small caps, investment trusts, and eventually all sorts of securities both here and abroad captured my imagination.

Active investing had weaved its magic on me.

I don’t write much about my active investing on Monevator. Mainly that’s because I think few people should do it, and that the reasons why you might are nothing to do with planning for a comfortable retirement.

I pick shares for the fun, the challenge, and because I seem to be compelled to. Most people should invest passively, but increasingly I don’t.

As Walt Whitman wrote:

“Do I contradict myself? Very well then, I contradict myself. I am large, I contain multitudes.”

With that wealth warning and the pretentious poetry out of the way, here’s a few things I’ve learned that might be useful whether you’re a passive or an active investor.2

Maybe these are all obvious to you, and I was a bit slow on the uptake. Or perhaps you need to live through some things to really understand them.

1. It will happen again

When I first started learning about investing, I thought I’d arrived late to the party. Everyone was licking their wounds from the dotcom bubble, and everyone knew Warren Buffett’s maxims about being greedy when others are fearful.

There seemed little to do but hand over my money to the robots.

How wrong could I be? If anything people are forgetting faster nowadays. Within a few years of my starting, we were neck deep again in a bear market that had its roots in excessive risk, and equities were supposedly dead as an asset class.

It’s all happened before. It will happen again. People don’t change.

2. Not everyone is contrarian

The day I left school, I walked out of the back gates while everyone signed each other’s shirts at the front. I had friends, but I was no friend of school. I hated being told what to do, what to think, and when to do it.

Throughout my adult life I’ve regularly made the case for unpopular or even unpleasant notions. I wasn’t always right, but that isn’t the point.

“Look around this table,” an exasperated friend once said. “Can’t you see that every single one of us disagrees with you?”

She meant it as an appeal to switch sides. That sort of thing just makes me dig in harder.

Lots of investors say and even believe they’re contrarians, but they’re not really – they just think the popular and cool kids are contrarians. They think this while following the crowd.

I’ve had to endure a bit of flak in real-life for my willful ways. I’m essentially unemployable in a conventional office environment.

But in investing, being awkward and independent is a boon.

3. The bear case always sounds smarter

Perhaps it’s a product of being invested in a decade defined by various crashes and calamities, but being contrarian while I’ve been an investor has often meant being positive about the future.

In my experience, many people – particularly the 50-something males who dominate investing, both professional and amateur – think being contrarian means thinking the West is doomed, that productivity is dead, that the stock market is done with, and so on.

The adage that the bear case always sounds smarter is a rare case of something I decided for myself – rather than reading it first – although I soon discovered that wiser minds had reached the same conclusion long before.

I don’t know why it’s true, but it is. People are drawn to doom mongers and see the logic in their every utterance. Just look at the almost invariably gloomy news headlines – those editors know what people want to hear.

Perhaps it’s to do with our biologically driven risk aversion3.

The irony is you can waste a lot of time and lose or at least forgo a lot of money by being a pessimist when investing.

There’s always a good home for your money somewhere.

4. It’s okay to sell shares

As a newbie, I was much taken with Warren Buffett’s supposedly favourite holding period: Forever.

Later on I learned Buffett often didn’t invest like that, and neither would I.

I still see the logic of buy-and-forget for certain kinds of portfolios, particularly if you want to be a stock picker for whatever reason and yet you only have limited time, interest, or application. (In most cases then you’d be better off being passive, but that’s another 900 articles…)

These days though, I revel in the joy of selling shares.

I won’t debate running winners versus cutting losers, or how you never went broke taking a profit. All the adages are true, and contradictory.

I’ve lost all the money I put into one company, and one share I sold is up at least 20-fold last I looked. This sort of thing happens to you if you actively invest long enough.

What I will say though is I love the feeling of going to cash. All the risk evaporated in an instant, until the next opportunity-cum-booby-trap.

If I could get 8% on cash in a tax shelter in a 3% inflation world, then for all my love of shares I’d probably go 50% cash tomorrow.

5. Compound interest works. It really does.

It’s a daunting climb when you first set off towards your investment goal, whether it’s financial freedom, early retirement – or being able to pack up work at all.

But it gets easier. Honestly!

The great thing is that your money starts to do the heavy lifting for you. Eventually your portfolio goes up and down in a few weeks by amounts that would have taken months if not years to save.

This is mathematically obvious. If you earn say £40,000 a year and you can save £4,000 a year, then when your portfolio is £80,000 in size, a mere 5% fluctuation equates to your annual savings. Over the years, your money compounds copiously.

Still, seeing is believing. I recommend it.

6. It pays to pay attention to taxes early

I’ve written a lot of posts about taxes and investing because I have a fair amount of money outside of ISAs and SIPPs, and it causes me headaches every year. I’d rather you avoided them.

Nowadays I fill my ISAs religiously, but I didn’t open any until 2003.

I’ve been shoveling money over as fast as I can each year, but it’s clear that short of retreating to an Ashram and renouncing all worldly work, I’ll never get all my money tax sheltered.

That means faffing around to try to avoid capital gains taxes, taxes on dividends, and so forth, and it has entailed long fiddly submissions to the Inland Revenue.

Utterly annoying.

Some people criticise my emphasis on reducing or avoiding taxes. Good for them if they can afford to forego the thumping great swathes that taxes will chew out of their investment returns, on top of whatever income tax they pay on earnings. It’s enormous.

I can’t, and most of you can’t either. So think about taxes early.

7. The market is not completely efficient

I don’t have much to say about this. I’ve read the literature. I know that some academics will disagree with me and say I didn’t see all the risks, or that I was being paid to supply liquidity, or whatever.

But if you’re any “good” at active investing – itself a rightly controversial subject, and in most cases probably synonymous with luck – then you eventually see too many signs of the inefficient market to put it in the same box as pink elephants, the yeti, and Father Christmas.

That’s not to say you or I can profit from market inefficiencies.

I’ll not be completely sure whether I’m a good investor for as long as I live, whatever returns I post. Some say even the acknowledged greats would need to re-run several more lifetimes to be certain.

But I am sure the market is not efficient.

8. Everyone always saw it coming

Given all the doom-mongering out there, it’s inevitable that there’s someone who predicted whatever crash or catastrophe last hit us, or whatever one is around the corner.

True, they often spoke years too soon, and there are rarely very many of them – certainly compared to the vast number of people who claim they saw it all coming once it has actually come.

It’s the same with good news. Most fund managers only bet on shares going up, so if there’s a new tech revolution or a banking renaissance or whatever, then some handful of people will have opined upon it beforehand in a note or an interview, even if most of us dismissed it as a fad.

When I began investing, I thought everyone had much more foresight than me.

Hah!

After I wised up I’d get really infuriated by this retrospective brilliance – until I realized that most of them genuinely believed their memories of their accurate forecasts to be true. Such self-delusion must be another of those cognitive bequests from evolution.

I’m sure I do it to. But I also write a blog, so at least you can see some of my bad calls alongside my good ones.

The bad entries are a usefully humbling antidote should anything be going too good for five minutes.

9. Many shall be restored that are now fallen

Ben Graham, the man who taught value investing to Warren Buffett, touted this quote from Horace:

“Many shall be restored that are now fallen, and many shall fall that are now in honor.”

Graham was talking about value stocks that come back from the dead. Horace was talking about words and poetry.

No matter, they’re both right. People are creatures of fashion, and we’re all subject to economic cycles.

As I put it less poetically: Never say never again.

10. Barring a revolution, this is going to work

While I’m an optimist when it comes to investing, I’m a gloomy old soul when it comes my personal circumstances.

I’ve few doubts that when I hit my goal of complete financial freedom, the 99% will rise up and tax or take it away from me.

Just my luck! After 30 years of capitalism, a frugal saver who happened to learn the ropes will be first up against the wall.

An indebted peasant’s revolt aside (and touch wood – illness or misfortune can strike at any time and is the sort of thing we should really spend our time worrying about), I can now see that this self-directed investing lark is very likely going to work out for me.

In fact, my problem is more likely to be remembering why I was doing it, because I’ve grown to enjoy it so much for its own sake.

My capital has increased six-fold since 2003, through a mixture of saving and investing returns. The Accumulator warned me earlier this year that there was no way I was going to liquidate a big chunk of my portfolio to buy a house – because he knows I’ve grown to love running what he calls my “DIY hedge fund”.

That tells you that The Accumulator is as astute about people as he is about cheap discount brokers. (You should hear him on Prussian military history).

I couldn’t imagine in 2003 that investing would become such a passion that a decade later I’d be spending dozens of hours a week on it, willingly and with a smile on my face.

Be careful what websites you read. Next up it could be you!

  1. I’d already squirreled away multiples of my post-tax annual income. []
  2. i.e. This is not what I’ve learned about reading a balance sheet, or about returns on incremental capital, or about subordinated debt, et cetera et cetera! []
  3. Although we don’t seem to be able to apply our desire for survival to genuinely important risks, like the degradation of the environment. []

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{ 14 comments… add one }
  • 1 gadgetmind November 20, 2013, 11:54 pm

    Most people in my office are essentially unemployable in a normal office environment but everyone comes to work with a spring in their step because I work hard to keep it that way.

    I keep it hard-working but casual, treat people with respect, give them creative and challenging work to do, and make sure they don’t lose touch with why our particular “industry” excited them in the first place.

  • 2 Rob November 21, 2013, 10:46 am

    You know that is one of the best things I have ever read about personal investing.
    Now I know why contrarian investing is so unpopular.

  • 3 Jon November 21, 2013, 11:23 am

    TI, will you ever give us a breakdown of what you are actually invested in – dividend shares, ETFs, bonds, prefs, PIBS, other more complex financial instruments ? I know in the past you have batted this one away. Some bloggers give the complete portfolio. Anyhow, really enjoyed the summary, I can relate to many of the points, especially point 1. I new very little about investing (just an Aviva Stakeholder employer pension) and did not invest at all during the crash of 2008/2009 and feel it will never come around again. Maybe start of tapering will give me another bite to load up on cheap shares. Looking forward to your sequel in 2023.

    Best Regards, Jon

  • 4 King of Cornwall November 21, 2013, 12:18 pm

    I’m with gadgetmind on this. Eight years of serious active investing has been exciting and financially rewarding, but doesn’t come close to the buzz I got from nurturing a small company from startup to sucess.

  • 5 Ian November 21, 2013, 2:05 pm

    An interesting article, I am new to (serious) investing and have been reading a lot on your site over the past 3 months. I have spend the past 7 years building up my company from startup to success and it has been richly rewarding in experience and economically, but unlike gadgetmind and King of Cornwall I am more excited about this investing phase than I am now about my own business. Partly because my business runs without my input now but more so because I feel generally excited about learning and executing a skill-set that is new to me but that I feel almost obsessively drawn to. The other driver is that all of my eggs are in one basket (my business) and I see the investment world as diversifying. Talking of which I actually came back to your site today to revisit my asset allocation from some of your previous blogs but as always got caught up in what you were writing. Great blog.

  • 6 Ric November 21, 2013, 4:12 pm

    Great post again. Thanks

    I’ve been doing this since 1999, and agree with every one of your ten points.

    What most people forget about point 6 (Tax shelters) is the impact of point 5 (compound interest). When the impact of point 5 takes hold, it is too late! (Assuming you wanted all your capital tax sheltered). Like you say, and like the standard advice for savings & pensions; tax sheltering is something best done from an early age.

    Also the paper work on ISA investments is massively easier!

  • 7 ermine November 22, 2013, 12:33 am

    I love this post – it’s a brilliant summary of lessons learned, and some great pearls, It will happen again is one of those things that is easier to learn through experience 😉

  • 8 Roger November 22, 2013, 9:29 pm

    So why have you in the past banned comments from investors who also consider themselves to be contrarian investors?

  • 9 dean November 23, 2013, 8:23 am

    I have a lot of fun with share picking. I also like the challenge and it keeps my thinking about what is really going on in the world. Sometimes I have a lot of fun with my losers (the majority!) too. They seem to make better conversation. People switch off when you start telling them about your successes. But tell ’em you lost a grand on such-and-such a stock because the management team blew all the companies capital at a string of strip joints and they listen intently. The listener still thinks your bonkers for continuing to play but they are interested when you talk about what didn’t go right.

  • 10 Jim November 23, 2013, 10:11 am

    Another great post. It’s the quality and style of writing that pulls me back to Monevator versus the amount of technical drivel and crystal ball codswallop you see on many other sites! Keeping it simple is such a skill in most fields, especially investment, and I like how your clear messages and observations can be repeated many times while you still manage to make them come over as fresh.

  • 11 The Investor November 23, 2013, 10:32 am

    @gadgetmind @kingofcornwall — Well, I don’t see that they’re mutually exclusive? 🙂 I’ve enjoyed some action in the start-up area too, though I wouldn’t dignify my experiences with the word ‘success’. Perhaps “close but no cigar” would be a good evaluation…

    @Rob — Cheers!

    @Jon — I’m not planning to do a full breakdown for a variety of reasons. This might change someday — most likely if it did it would be part of some sort of subscriber-only service — but at the moment active investing articles are more likely to be sporadic and hopefully widely applicable, rather than anything overly focused on me. I decided a couple of years ago not to go down the route of Monevator as being too much about *my* investing successes and failures. And with the clear emphasis on passive investing that’s evolved here, I think it’d be distracting and unhelpful. The odd post, fine.

    @Ian — Thanks, and yes it’s an engrossing pursuit. That said it’s impossible to beat a ‘real’ business for wealth creation, so I hope you’ve timed your shifting interests with aplomb. 😉

    @Ric — Yes! When people tell me they don’t need an ISA, I tell them they need: (1) A compound interest calculator. (2) To be more ambitious.

    @ermine — Thank you.

    @dean — “Happiness writes white” as the novelists say. In some ways I think most stock picking successes are similar, but every failure is different, to paraphrase Tolstoy. And people are probably wise not to tune into stories of winners…

    @Roger — I haven’t banned anyone. I have shifted to stating that I will delete comments that I don’t feel, in my arbitrary position as blog owner/editor, are not constructive. Since then I have deleted perhaps three comments, although this could be due to successful self-censorship of course (and if so, thank you to those who have self censored).

    Some comments that might get deleted (or where the person might feel ‘banned’) were fine said once, but repetition became part of the problem.

    One basically feels the Internet is some free-for-all, regardless of who created a site/venue, or one feels that different sites are better curated by somebody who decides what goes *on their site*. I have decided the latter is best for Monevator.

    What led to the decision wasn’t that people said they were active, or that they were contrarian (some of those who have commented above have mentioned their active investing from time to time, for example). It was that they said “this way works”, and implied or stated that “that way is dangerous” or similar.

    Also, they are very often factually incorrect. So they will say something like “Why sit in a passive fund and go down with the market when you can do better by being intelligent about it”. In reality, the vast majority of people will *not* do better by trying to do better, the evidence is utterly overwhelming. (If they included that caveat themselves, I probably wouldn’t have had a problem with the comment). So I got bored/frustrated with mopping up after what I saw as misleading advice on a site I’d created.

    If you read my “valuing the market” articles you’ll see what I consider to be the appropriate approach to active investing — humility in the face of the market, an acceptance you are trying something with the odds/evidence against you, and a resignation to the fact that you might / statistically are more likely to do worse. So you’re doing it for other reasons, not because it’s a no-brainer when the opposite is true.

    This is my view, and the one I’m tending to enforce with the comment policy. If I was trying to foist it across the Internet, it might be arrogant or whatever, but I think on one’s own site it’s fine. The only motivation is to try to help the majority of readers who come here.

    Hope that’s clearer now.

  • 12 gadgetmind November 23, 2013, 8:06 pm

    @TI – given the anti-everything mindless rants in the comments sections of the mainstream media, the monevator comments are a breath of fresh air. OK, so everyone may not always agree, but you can disagree with someone without being disagreeable.

    Whatever you’re doing to keep it this way, please keep on doing it!

  • 13 theFIREstarter January 25, 2016, 6:40 pm

    This post could be worth thousands of pounds to any would be investor!
    I will be sure to bookmark and share as and when is appropriate.

    I totally agree on your point on market efficiency. How anyone could state that such a large and complex machine is efficient at all times with a straight face is simply deluded or an outright charlatan IMHO.

    It reminds me when I used to dabble in sports trading on Betfair, the forum would be full of people saying “you can’t make money trading x,y,z because the markets are so efficient”. But you can easily spot prices that had been matched that were so far out of line, someone was clearly making money on those innefficiences (and it wasn’t me! Very likely automatic trader bots) 🙁

    Cheers!

  • 14 Quality-NG July 17, 2016, 9:20 pm

    Hi TI,

    I’m in my early 20s and started learning about investing back in uni years.

    I’m currently working in London, in a finance-related profession, and I’m from a foreign country (think Asia!). I spend a lot of my free time actively investing like reading up on companies, researching etc as it has always been my hobby ever since I learned about it. I’ve been following your website as a source of motivation for saving and investing, and very appreciate the many points you and your co-blogger have made as they are all great advice.

    One of the points you guys mentioned was that investing/financial independence is a lonely pursuit in which we won’t encounter many people who share the same interests, especially people in their early 20s, who tend to be interested in travelling, sports, watching TV series rather than investing in stock market. So maybe from your past experience, did you have an urge to talk about investing to colleagues at work, given that we spend the majority of our time with them? and how did you cope with it? either by not talking to them about investing at all or talking to them about it but not by much.

    Thanks! Appreciate your thoughts/advice.

    Thanks!

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