It may sound easy to sit back and relax by simply buying into stocks like Google, Apple and Netflix 10 years ago, collecting huge investment gains, adding to our existing pay check, enjoying a better lifestyle with additional income.
Well, in reality, it’s extremely difficult to identify those great companies.
Google’s co-founders actually approached Warren Buffett and Charlie Munger for their advice prior to Google IPO in 2004. Warren Buffett disclosed in Berkshire Hathaway Annual Shareholders Meeting that Charlie Munger and himself, could not understand Google’s business model and Berkshire Hathaway missed out the stock of the decade.
Even Warren Buffett and Charlie Munger missed out Google and they had many chances between 2004 and 2019 to buy a substantial stake in Google but they didn’t buy a single share. Also note that Berkshire Hathaway has always been sitting on huge cash pile to the tune of $100 billion. Google could had been the “Big Elephant” Warren Buffett would want to buy for Berkshire. In recent years, Warren Buffett admitted to the press that he should had spent more time to study Google and not missing out this great company.
It is understandable that Warren Buffett could not understand the internet world well. Mr. Buffett once invited media to film a short video of his office. He is still using a very old TV and an old computer. On his desk, there are some newspaper and some annual reports. Mr. Buffett had long revealed that his secret recipe to investment success is to spend many hours in a day to read as much as possible. Mr. Buffett also revealed that he is not good with computer and he is still using an old flip phone, not a smartphone, for one of the world’s richest man. Back at his home in Omaha Nebraska, Mr. Buffett will turn on his computer after work, and playing Bridge online, sometimes with his best friend, Bill Gates.
It is debatable whether Warren Buffett is really good at technology investment. Although Berkshire Hathaway has always shunned technology stock for the longest time, Mr. Buffett did invest in technology stock, and it is Apple Inc.
Reading the history of others’ investment success may lead you to think that you can also do it by reading up on companies or industries that you know better than the average Joe out there. However, in practice, it is very difficult to achieve investment success.
First, you need to have a basic understanding of accounting, finance and economics. CFA Institute holds the Chartered Financial Analyst examination every year. Most of the investment professionals do take the CFA examination and a good majority of them completed this very difficult examination. CFA examination is widely regarded as the most comprehensive self-study program that helps the candidate to learn the ropes in investing.
In order to get the CFA charter-holders, you need to pass 3 levels of exam. The passing rate of each level of the CFA examination is roughly about 40%.
Every year, more than 200,000 highly educated working adults take part in all three levels of CFA examination. As of June 2019, according to CFA Institute, there are 165,000 CFA charter-holders worldwide. Remember, the passing rates for each level of CFA examination is only 40%. In other words, every 100 CFA examination takers, only 6.4 of them will pass the Level 3 examination and get the CFA Charter. Due to the low passing rate of only 40%, many CFA charter-holders have to re-take the examination if they fail to pass it.
Mathematically analysing the numbers, there could be as many as 2.58 million candidates who had ever taken the all three levels of CFA examination, since the CFA designation was created back in 1962.
If you google “How many hours do i need to pass CFA exam”, you will read a lot of advice from CFA charterholders. The general consensus is that the candidate needs to spend at least 300 hours to study each level of CFA examination. Assuming you are smart enough to only study 300 hours per examination, you need to spend a total of 900 hours to pass all three levels of examination, at first trial.
Assuming you are very hardworking and spend 5 hours a day on average (3 hours on weekday and 10 hours on weekend), 7 days a week, to prepare for the CFA examination which usually holds in June, you need to study a full 8.6 weeks, for each level of the examination.
Each level of CFA examination has 6 textbooks, on average 500 to 600 pages per textbook. In other words, you need to read up about 3,000 to 3,600 pages of textbooks before you can start practise the difficult questions. On average, an adult can read 500 words in 2 minutes. But reading CFA textbooks is not like reading a novel. After reading it, you need to understand it and grasp the full understanding of the accounting, finance, equity valuation concepts. The most difficult part of the CFA examination, in my view, is the Ethics. CFA Institute holds a very high standard of ethics for all its candidates and its charter-holders. The No.1 volume of the CFA textbook is Code of Ethics and Standards of Professional Conduct.
In my opinion, the reason the Code of Ethics and Standards of Professional Conduct is very difficult is simply because you can’t quantify qualitative information. There is no formula to find the right solutions. Usually, CFA Institute requires its members to uphold the highest possible Standards of Professional Conduct, under any circumstances. Do note that CFA Institute uses the phrase “highest possible” standards. In the world of law, there are too many areas that are hard to draw a clear line to define what is absolutely right or wrong.
There are a lot of Investing Academy out there offering many courses that teach investing skills. However, i think that CFA program is the best you can get. The only downside to it is that it takes at least 900 hours, equivalent to 27 weeks of hard core studying, to complete three exams, over three years period.
If you are serious about learning the rope of investment business, that is probably the cheapest way for you to start with.
After completing the CFA program in three years, then you have more time dedicating to learning everything you need to know about a business, an industry. It may seem easy when you read your mutual fund manager writes about their many big winners in the past year. The few pages of annual portfolio review condensed the fund manager and his team of analysts years of deep research into the company, the industry the company operates in, and even more research into the company’s competitors, before they make the investment decision to buy the company.
Malcolm Gladwell published one of his very good book, “Outliers: The Story of Success”, in 2008. Malcolm Gladwell repeatedly mentioned the importance of practicing the 10,000 hours rule. He argued that, in any fields or any profession, it takes at least 10,000 hours for anyone to become an expert in their field. Take for example, Tiger Woods picked up golf before he turned two and he becomes one of the best golfer of all times in his early 20’s. Warren Buffett, also started learning the rope of investing at the age of 6 when he bought 6 bottles of icy coca-cola from his grandparents grocery store and resell it on the street to complete stranger at a decent margin. Mr. Buffett also took the opportunity to read all the books about business and investment his father had when his father brought the young Warren Buffett to his brokerage office.
Cristiano Ronaldo, probably the No.1 or No.2 football player in the world today, started playing football on the street of Madeira Island, Portugal since he was a kid. He started playing amateur football by the time he turned 7. In his movie “Ronaldo”, he revealed his secret of becoming the best football player in the world. He trained very hard every single day and he only drinks water. In Sir Alex Ferguson Autobiography, Chapter 8, Sir Alex Ferguson repeatedly praised Cristiano Ronaldo perseverance in every training sessions. Ronaldo always the first guy on the training ground and the last one to leave. Cristiano Ronaldo wins his first Ballon dOr, the world best footballer of the year, at the age of 23, with a record vote count, in 2008. In the movie “Ronaldo”, Cristiano also repeatedly mentioned that there is no other way to his success than by training hard and live a very disciplined life. Cristiano Ronaldo once invited his teammates to his house to enjoy good food from his personal chef. His teammates were all shocked when his personal chef served them water-boiled chicken and a big plate of salads. This is how disciplined Cristiano Ronaldo is. Behind all his flashy sports cars and 5 Ballon dOr trophies, it is all pure hard work. Even at the age of 33, playing for Juventus in Italian Serie A League, he scored 21 goals on 31 appearances, top of his club, No.3 in the League. He also contributed 8 assists, ranked No.5 in the league.
Becoming one of the best in any fields, requires huge passion for it, relentless pursuit to become better everyday. Without strong will and perseverance, you might drop out of your passion before hitting the 10,000 hours mark. Assuming you are willing to spend 8 hours a day to pursue your passion in investing and you are willing to do it 6 days a week. It takes 4 years to reach the 10,000 hours mark. On average, an working adults only has 3 to 4 hours a day after working hours to pursue their personal interests. For non-investment professional, you can only spend a maximum of 4 hours a day to learn investment. It probably takes you 8 long years, before you cross the 10,000 hours mark. Let’s not forget that there are hundred of thousands of investment professionals spending at least 8 hours in office doing investment works and some may continue to do investment works after working hours at home. There is very little chance for any individuals who holds a non-investment related job, to really become the best of the best among investment professionals, at least not without a very long period of relentless research into companies and industries, before knowing more than the investment professionals in their own game.
That being said, there are still many very hard working non-investment professionals achieved huge success in investment fields. Almost all of them stick to one very simple strategy, which is to understand only a few companies deep down and inside out, wait for the right time to buy those shares. After that, continue to check their investment thesis so that their bullish view remains intact.
However, if you spend a great deal of your free time everyday reading investment articles online, trying to figure out which stock is the best to buy. Over time, you will succumb to short-term investing scheme. I will call it speculation in stock market.
Economics 101 teaches us that stock market is a place with imperfect information and also asymmetric information. What that means is that you can’t get all the information or facts about a company. The management or the CEO of the company always knows more than you. Asymmetric information means the management of the company sometimes may not reveal the full picture of the business outlook, even if they do have a pretty good grasp of what is going to happen to their business in the next 3 months.
All investors, including the professional fund managers have to deal with this tough situation in the investing game. There is no way any investors could claim that he has never lost money in stock markets. According to various studies, professional fund managers can pick a money-making stock about 60% of the time. Only the very good one will have a hit rate of 70% or even higher.
And that is not the end of the story. How much money you make from your winning stocks and the money you lose from your losing stocks will determine your portfolio total investment return. Risk control is also very important.
To conclude, you need to have certain basic knowledge in the following fields:
- Accounting 101; advisable if you also learn Intermediate and Advanced Accounting as well.
- Forensic accounting; so that you can identify fraudulent companies that cook their books and avoid them at all costs.
- Finance 101; the basic.
- Advanced Finance; teaches you how various derivative products work and influence the market.
- Equity Valuation; to understand the conventional methodology to valuing a company or a business.
- Economics; macro economic trend is also a very important factor in your investment decision making process. If you buy a great stock before the economy dwells into recession, it takes a very long time for you to recover.
- Critical Thinking; no investor can make good investment without forming their independent thinking, this requires years of training to be reasonably good at critical thinking. Most savvy investors out there are an expert in Advanced Critical Thinking.
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