Over the last years I gained a lot of investing experience in various fields. It goes without saying that in order to be successful you will first have to go through a series of mistakes and due to the increasing volatility you’ll have to bring a lot of patience with you.
The Faster You Embrace Your Mistakes The Smoother It Gets
I made a lot of unnecessary rookie mistakes when I started out that could have been avoided with a more conservative approach, but what I understand now is that you should be very grateful for any mistakes you make (not only in finance, but your life in general). Mistakes are really what will set yourself apart from the competition. Through mistakes we gain valuable insights into market dynamics and sometimes even ourselves. We learn how we react to certain situations. Only if you understand who you are, can you truly embrace your mistakes. And for that I found evolution theory incredibly useful.
Business And Finances: Conservative vs. Opportunistic Approach
There are always times when money is tight. Any business in this world heavily relies on a strong cashflow. If insufficient money is coming in, you can’t invest into your core business, you cannot expand, you cannot hire. It’s as simple as that. When money is flush all of that comes easy; too easy – you start investing and may end up investing into things that are not as profitable as you thought or you expand too quickly and neglect your core business. It not only happens to small businesses, it happens to conglomerates like Vivendi or Time Warner. Mistakes are not a “bad thing” , it’s something you have to accept and prepare for.
What I’ve learnt from my own experiences is that a very conservative approach can prevent you from unlocking your true potential. If you say no all the time and you rarely take any chances, you will miss out on a lot of opportunities. In today’s world that approach is most often practiced by entrepreneurs with a strong background in finance and science. Many of them are successful, but a lot of them won’t make it, because they never take any risks.
A lot of young, creative entrepreneurial people on the other hand take any opportunity that presents itself. And that approach is problematic too. If you don’t focus on your core abilities and take the time to really identify who you are and what values you have, you will end up being involved in so many projects that you will never succeed. Focus is the key to success.
That doesn’t mean pivoting for several years is bad practice, in fact I would encourage every new founder to spend several years on finding his real ‘purpose’. Interests and market demand change over time, so in a few years you may be doing something completely different than what you set out to do. Change is good and inevitable.
Going For The Golden Middle Way – With The Help Of Evolution
The golden middle way is what we should aim for. But how do you decide what is too conservative and what too opportunistic? In today’s world we most often find people who are either left-brain dominant or right-brain dominant. As you may know, a different dominance leads to different types of thinking. Following the theory of evolution, a right-brain dominant person has most likely more hunter genes. A left-brain dominant person may have inherited more genes from a gatherer. Based on this assumption you can only come to one conclusion: To make the best decisions you need both.
In order to succeed in today’s world, you need the creativity and entrepreneurial traits of a hunter, but also the rational, analytic, long-term thinking of a gatherer. And there’s only one way to get there: By training the other side of your brain and finding the perfect balance. Personally, I used to be a right-brain thinker, but through programming and investing I rewired my brain to be more rational and analytical. Playing chess is a great method too to get better at long-term thinking. If you’re already a very analytical thinker, you should spend time creating art: Drawing, taking photos, dabbling in Photoshop are all activities that will relax your brain and help you to activate the right half of your brain. Most of us know that, but few are willing to go the extra mile and truly engage both sides.
Training Your Brain Through Investing
Without people betting on the demise of a company, stock bubbles would be far more common. However, this also means that volatility is a fundamental quality of equities.
When you get into the investing world one of the first things you will learn is that investing involves a great deal of emotional intelligence, something people with a left-brain dominance may have problems with. On the other hand it involves a lot of rational, analytical thinking, reading through quarterly reports and analyzing important metrics such as accounts receivable, debt to equity, earnings per share and many other metrics. It also involves a great deal of patience and ‘grooming’.
Then when you have bought into a company, you need to be able to rationally deal with short-term losses. It’s a very difficult thing to do, because we instinctively want to sell. On top of that, our brains tend to get very euphoric when spotting opportunities and we tend to buy far too large stakes in a company all at once. But in such a situation the opposite is required of you: 100% pessimism and critical-thinking. There will always be pullbacks. It’s a fundamental principle of the stock market. There are opposing parties: Shorts and longs. Without people betting on the demise of a company, stock bubbles would be far more common. However, this also means that volatility is a fundamental quality of equities.
So, in essence, you need to be able to rationally plan ahead and deal with pullbacks. For a right-brain dominant person that is a great exercise, because it will require you to be conservative and analytical. For a left-brain dominant person it is also a challenge because he has to keep his emotions in check and tackle the issue of volatility.
You don’t have to invest much for this exercise, even a $100 investment can get you involved and you will quickly learn that it’s a great way to learn more about this world we live in and surprisingly also about yourself. The stock markets has all sorts of participants. You have the hopeless optimistic bagholder who’s always bullish on anything he invests in. You have the pessimist who is constantly looking for dishonest companies to short them into the ground. You have institutional investors who are spending a fortune on analysts to make sure they get into stocks before they take off. You have the gamblers, betting everything and their house on small caps with growth rates in the triple digits (per month of course). You have many, many different cultures participating in one single market. Unsurprisingly, there will always be losers and winners.
Image: Nasdaq Composite 1990 – 2015. Source: Google Finances
To be on the winning side you need a plan and you need conviction. You need a sound investment hypothesis to begin with, but more importantly you absolutely have to have enough guts to face reality when the market proves you wrong. That includes knowing the difference between boldness and foolishness. That’s what makes investing so difficult, the market may judge certain signals like QE, currency wars, Greece very differently. Because of that, some of the best investments will always be top brands everyone in this world recognizes: Apple, Google, Sony, Ferrari, VW, Amazon. Even if you get in at the very top, you can be very sure that in 10 years these companies will have a higher market capitalization due to capital appreciation and inflation. Inflation will never truly go away, it’s a built-in system you can count on. That’s what sets the Dollar apart from Bitcoin and commodities.
In A Nutshell
Avoiding extremes can lead to greater success. Unfortunately, our brains and health often get in the way of reaching our goals. But play your cards well, understand who you are and embrace your problems and you will get there.
Genes, diet and environment greatly affect how you live and think. In fact, I would go as far and say that evolution decides who you are in this world, but where there’s a will there’s a way. Bad genes can never hold a good man down. Understanding methylation, nutrition will help you to stay sharp and to unlock your true potential.
It’s all part of the game and the sooner you accept your business or investing mistakes the sooner you can overcome them and embrace them. They become part of you and your life experience which you can use to make not only your life better but the lives of people around you.