The Silent Hurdles of Most Retail Investors: Beyond Books and Theories
How Personal Trials and Expert Insights Shaped Your Understanding of the Stock Market
Life in the stock market is like navigating a labyrinth; you take many turns, hit dead ends, and sometimes double back, but each step brings a new insight. It's not just about the stocks you pick, but the lessons you learn along the way.
'The true art of investment isn’t in the wealth you make, but in the wisdom you gain.'
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New here? I’m Michael and on a mission to make beating the stock market as easy for you as choosing your favorite ice cream. I write an algorithm that does exactly that.
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This week, an email from Karlis resonated deeply with my own journey in unraveling the complexities of the stock market. It reminded me of the ever-changing nature of the market.
What do I mean?
Ever noticed how the stock market it’s like chasing the white rabbit that keeps changing its mind? Like if the market has a thing for certain ‘strategies’ or ‘metrics’ but they stop working when you apply them?
Take Joel Greenblatt, for instance. The guy had a pretty neat strategy: pick stocks that are good and cheap, and wait for them to rise to the mean. Simple, right?
But here’s the catch: once everyone started copying his method, these stocks weren’t so cheap anymore. The prices got pumped up, and suddenly, Greenblatt’s formula wasn’t the golden ticket it used to be.
So, what’s Really Going On?
Here’s my take on this whole cycle. By the time we get our hands on these investment strategies from books and gurus, we’re already a step behind. The ‘industry’ – the big players and insiders – they’ve already been there, done that. They catch wind of these tactics, like Greenblatt’s, way before we do. They jump in, make their money, and by the time we show up, the opportunity’s that can be found with these strategies are pretty much squeezed dry.
It’s a bit of a bummer, right? That’s just how the industry rolls, always one step ahead.
Even after a lot of books and courses on stocks, I still couldn’t figure out how to apply all that knowledge in real life.
While contemplating the limitations of popular strategies like Greenblatt’s, I began exploring more profound educational resources to enhance my understanding and approach.
I signed up for a course because they had this cool thing called “office hours” where you could ask any question. A great chance to get some real insights, right? After we got our lessons, I still had a bunch of questions like, “Where and how do you find cool stocks to invest in?” or “What’s your go-to strategy and why?”
I was pretty excited, throwing all these questions at them, hoping for some insider secrets or something tangible. But guess what? The answers I got felt more like they were gently nudging me towards their next course, saying things like “… this not the scope of this course …” and gently pushing me to join their exclusive community for the ‘real’ answers.
Not exactly what I was hoping for. This realization led me to pivot my strategy, focusing less on well-marketed, popular courses and more on my own independent, in-depth analysis. This approach, combined with my code, led to a lot of insights.
But there was more
Karlis email led me to reflect on resources that really helped me step up my game. Resources that transcend the timely, classic, and still true wisdom of Warren Buffet’s literature.
Speaking of invaluable resources, let me introduce you to a game-changer on my investment journey.
The Goat that changed a lot for me
Enter Aswath Damodaran, a professor at Stern University in New York. The discovery of his work was like a hidden treasure trove that had been there for years. His approach is refreshingly honest, without the artificial magic, and devoid of sales gimmicks. If you’re looking for in-depth investment knowledge without breaking the bank (I mean exactly that), his website is a goldmine and everything is - for free.
But be warned, it’s a deep rabbit hole that if you are like me, you might spend months exploring!
Yes, it’s like going to the university again, because it’s not as entertaining as watching a polished YouTube video, but you learn a lot.
If this is your goal, he is the man you are looking for.
Here is the link to his website:
The Unvarnished Truth
What I admire most about Damodaran is his frankness. Despite thorough research and analysis, the stock market’s behavior can remain unpredictable, often challenging even the most well-informed investor.
The Duality of Stock Analysis
In stock analysis, there are two main approaches when it comes to fundamental analysis: forward-looking analysis, which forecasts a company’s future, and backward-looking analysis, which is grounded in a company’s historical performance.
While some debate over which method is the better one, I find comfort in the latter’s tangible and seemingly reliable approach.
Here is why.
I have seen how well the first approach worked when every course participant came to a different conclusion with this analysis confidently sharing why he thought he is right. The data basis is crucial here and, as with everything, even with the best data there is no guarantee that you are right, but you can make informed guesses. Of course, you can combine both approaches.
Beyond the Classroom
Professionals widely use Damodaran’s teachings, amplified with mathematical models to scale them. They scour the market for statistical outliers, crafting strategies around these patterns. This blend of art and science is their well-guarded secret, much like the mysterious algorithms of Google.
My takeaway is this
Understanding the difference between a stock’s value and its price, and marrying good value with an attractive price, is more art than science – a skill honed by relentless research and groundwork.
The Frustrating Reality of Investment Literature
Unfortunately, most investment books are more about entertainment or setting the stage for the next bigger service. They entice with insights but often leave the reader with a lot of questions churning for more. This is where resources like Damodaran’s become invaluable if you are willing to invest some time.
I would love to be able to download what I know, or what Mr. Damodaran knows into your brain, but that’s not possible - at least right now. But I can point you to my best sources, and yet you have to take the learning into your own hands.
Conclusion: The Endless Quest for Knowledge
The million-dollar question you might have in your mind right now could be this.
Is it worth it?
When do all those hours of learning, analysis, and number-crunching start to show up in my bank account?
What every analyst is basically trying to do is like matchmaking – finding a stock that’s actually valuable but still going for a bargain or a fair price. It’s the dream scenario, the happy end we are all looking for, but there’s no magic button for it.
It boils down to putting in the work – digging into research, getting your hands dirty with the details, and setting the groundwork. That’s the name of the game.
As you navigate the world of investments, remember that knowledge is your most valuable tool and treasure.
As I reflect on my path, I’m reminded that the true value lies not just in gathering knowledge, but in judiciously applying it to uncover opportunities others might overlook. It’s your ability to apply knowledge creatively and insightfully that sets you apart.
If my path sounds rather messy, you’re right, because it was. There is still a lot to learn. The good thing though.
Each step, whether clear or convoluted, has been woven into my understanding.
You know what? You can do the same.
Keep going StockStar.
Karlis had a great quote at the end of his email.
“Life can only be understood by looking backward,
but it must be lived looking forward.”
Soren Kierkegaard
Progress
Have you ever found yourself in the quiet contemplation of the everyday things around you? There is always something that catches your eye - a call for improvement - like the perfect angle of your TV, or a yellow maintenance light in your car nudging you to refill the wiper water.
I punch these tasks in my phone, and once it’s written down, my brain calms down. The only thing I need to remember is the place where it’s written.Moving my code to the cloud is the perfect moment for these tasks - digital housekeeping. I had this “what-if” voice in my mind. So, I reviewed my code this week for logic errors, ensuring no piece was out of place. After recalculating the returns, both manually and digitally, I breathed a sigh of relief: no errors found.
When I set up my new database, I excluded not publicly tradeable shares. This change has brought my results in line with the retail investor reality. This change causes redoing the parameter optimizations, which involves fine-tuning the variables in my models to enhance accuracy and reflect the latest market conditions. Happy that this adaptability is already on board, so I'm relaxed.
It was also encouraging to see that even with the updated database and “old” parameters, our projected annualized return would have been a respectable 18.9% for the current year, beating the Dow Jones ytd average of 9.2%.
Plan
With the new database in place, my next step is to calculate the parameters again. A task I look forward to with the recent results in mind.
What’s on my head
It’s beginning to look like Christmas! :-D
Tap that heart if you can relate!
Have a great day StockStar!
Michael
Recommend The Economy Rocket to your readers and friends
I share my stock investment story without sugarcoating – you get the good, the bad, and those tricky ego trips. I'm developing a service with a mix of smart code and proven investment strategies, making stock analysis a thing of the past if you wish. Because life offers so much more beyond the confines of stock analysis.
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Disclaimer:
The information in this article is my personal opinion. I’m not a certified investment professional. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. There are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk and do your own research as well. Investing in the stock market can lead to a total loss of the capital invested.
Great take and quotes, appreciate it!
Thank you Michael for your honesty! There are more and more people, who show us their creativity, ideas... when in reality they are just copycats. To recommend and show the real sources is next level and it shows that you respect these people, who create/created something special.