How to become a better investor

I love to run.  I enjoy being outside, and pushing myself both physically and mentally.  Running fills both of those needs.  I'd like to become a better runner by increasing my endurance, and decreasing my times.  The only way for me to achieve these goals is to go out and run.  I sometimes read about running, and think about it, but the only way to improve is to actually run.

When taking up a new activity reading isn't the same as doing.  You can read all you want about the activity, read others' experiences, but you need to do it yourself.  I had a co-worker who was much more passionate about running than myself.  He would spend hours reading about the body mechanics of running and knew everything about various running gizmos.  Unfortunately all this knowledge didn't make him a better runner, it just made him a more informed runner.

Knowledge alone doesn't make anyone faster; to become faster requires practice.  Ultimately speed is determined by a mix of practice and genetics.  I'm a fairly average runner, I can run three or four miles at a seven minute mile pace comfortably.  I'm not fast though, the fastest mile I've ever ran was 6:09, and that was in high school.  On my high school cross country team I was one of the slowest kids, not something I'm proud of, but a reality.  I ran the same workouts as everyone else on the team, its just my body wouldn't move as fast as them.  No matter what I tried I could never get it to move beyond a certain limit.  Fortunately I haven't degraded much over time, in my 30s I can run at almost the same speeds that I did in high school.  If I continue to degrade gracefully I'm looking forward to my 40s and 50s where I'll finally be able to win a race in my age bracket.

I think the parallels to running and investing are very similar.  A lot of what applies to becoming a better athlete applies to becoming a better investor as well.

I receive emails from readers asking me the best way to learn how to invest, and become a better investor.  The best way to learn how to invest is to get started and invest money.  Just like with running, you can read a lot, and think a lot, but until the shoes hit the road, or the money hits the brokerage it's all just theory.  There is an emotional component to investing that you will never experience until you see your money, the money you worked hard to save move up and down with the market.

Becoming a better investor isn't a matter of building a better process, or from practice researching companies.  Becoming a better investor is done through the practice of actually investing.  There is a feeling investors experience when they see their money drop 10% that you will never experience if you just follow a company.  Yes, a market loss isn't realized until you sell, but it's an emotional gut check to see a loss and contemplate the things you could have purchased.  It's also euphoric to take action on a stock and see the stock react the way you expected.  The idea that money was invested and almost out of nothing new money appeared.  No products were sold, no services offered, just a purchase, a period of waiting and voila, more money.

Getting started in a new activity is difficult.  I remember the first time I ever ran, it was in 8th grade in the spring.  I made it maybe a mile and thought I was going to die right there on the sidewalk.  It was a terrible experience, I went home and told my parents I was going to quit the track team after my first day.  They encouraged me to stick with it and give it a try.  About a week later I remember running three miles, the feeling of accomplishment was incredible.  What was impossible a week before was now possible.

The beginning of anything is difficult, you're starting from a standing still position, there is no momentum.  Once you've started you build momentum, it's easier to keep moving with momentum.  Researching and investing in your first company is difficult, it's not as difficult to invest in your 200th company.

Once you've begun and have started to gain some experience flaws will start to appear almost immediately.  You'll notice things you missed, or things you're not good at.  Continue to practice, but with each new investment work on fixing those flaws.    Continually iterate, learn what went wrong, fix it and try again.  From the continual iteration you'll start to build a repeatable process.  An investing process is never finished, it's always a work in progress.

Another way to get started is by starting small and simple.  Just like a beginning runner wouldn't run a marathon as their first practice, an investor shouldn't be tackling AIG warrants as their first investment.  Start with simple companies where the accounting is easy to understand.  Once you understand the easy accounting slowly start to invest in companies with more complex accounting that stretches your skills.

This method of learning and extending could be applied to investing in new industries as well.  A common complaint I hear is that banks are too hard to understand and they're black boxes.  Often the complaint will mention a money center bank such as Bank of America or Wells Fargo.  Instead of trying to run a marathon first why not start with a very small and simple bank?  Small banks have simple accounting and are easy to understand.  I'm singling out banks because I'm familiar with the industry, but the same thing could be said for oil and gas, or biotech, or really anything.

Just like people naturally run at different speeds, people invest at different speeds as well.  Just because Warren Buffett reads, thinks, and invests doesn't mean that if I replicate his steps the result will be the same.  No matter how hard I try I will never break five minutes on a mile, my body is not built for it.  I'm too old and slow, but I'm aware of my ability.  We as investors need to be aware of our abilities and limitations as well.  Some investors, the Superinvestors perhaps, are naturally more gifted.  I can never match their ability, but that doesn't mean I can't enjoy investing, or work to maximize my own ability.

The best way to get better at anything is to do it.  Do you want to improve at sales?  Then sell.  Looking to improve at marketing?  Start marketing.  Want to improve as an investor?  Invest.

The formula is simple, almost too simple.  Yes we can learn from the mistakes of others, and the experience of others is valuable.  But the best experience is your own.  You will remember your own mistakes and experiences better than you'll remember someone else's.

For a full outline of my personal investing system, go here.