When I was younger I would immediately take big positions. If I liked something, I would go all in. I was fearless.
This strategy worked until it didn’t.
Today I buy a third to a half of a full position after due diligence and I’ll add more as management executes. Inexperience almost always underestimates risk. The more you experience the more you respect what you are up against.
But it’s a balancing act.
Investing’s greatest lessons can’t be taught in a book or in a classroom. They have to be experienced and often times the teacher is loss. And losses can be painful.
The most painful part of loss isn’t financial but mental. The battle scars left behind can paralyze you. The spirit of courage you were born with turns to fear. Fear slows you down. Indecision can be an investors biggest adversary.
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The luckiest part of my investing career is that I’ve been old enough (37) to have emotionally invested through two bear markets (1999-2001 and 2008-2009) but still young enough to take advantage of the lessons learned.
From 1999-2001, while I was in college, I worked part-time for a brokerage firm. I was the “Marketing Administrator” which means I was the secretary who answered the phones. When the Dot Com bubble burst I heard from a large percentage of our 1,200 clients. They called our office in every emotional state you can imagine. And here I was an inexperienced 19 year old trying to calm them down. When I started the job I thought I wanted to be a broker. After the Dot Com experience, I knew I didn’t want to be a broker. Investing is hard enough dealing with your own emotions let alone the emotions of others. Investors can handle volatility as long as it’s only to the upside. In addition, I lost 80% of the capital my parents saved for me to use towards my college education.
In 2008, I had just made the leap to becoming a full-time investor. Simultaneously the markets went into freefall. Great timing right?
During the crisis I realised a few things.
First, The worst place to be invested during a crisis is in liquid, institutionally held microcaps (i.e. the large microcap segment). I found that when the economy or markets show signs of weakening, institutions take risk off. One of the first areas they look to liquidate is exposure to microcaps.
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