Unconventional wisdom: Three things I’d do differently if I started investing today
My answer is less about what I would buy than how I would change my approach.
Conventional wisdom is a byproduct of groupthink that presents solutions good enough for the average person while simultaneously not being right for any individual. You follow it at your peril. Each Monday I will challenge the investing norms that just may be holding you back from living the life you want.
Unconventional wisdom: Three things I’d do differently if I started investing today
You can’t go back and change the beginning, but you can start where you are and change the ending.
- C.S. Lewis
A reader asked me how I would invest if I was starting out today. It is a good question and something I periodically consider.
To be an investor is to be perpetually told you are doing the wrong thing.
No matter what strategy you select somebody will point out another is superior.
There are better investments than what you have in your portfolio and better ways to respond to current conditions. Better advisers to hire and better commentators to follow.
You hear it from mates and complete strangers. From people trying to sell you something and people just seeking your attention.
It is subtly whispered in past performance and brashly shouted in market predictions.
All of this makes investing a uniquely difficult endeavour. It is why many investors churn through approaches and holdings in a desperate search for perfection.
Starting over
I know the answer the reader wants and I’ve read articles answering a similar question.
It is helpful to hear about mistakes people have made and how they would have done things differently with the benefit of hindsight. But the underlying premise of applying today’s conditions to the past isn’t realistic.
Rather than focus on what would be in my portfolio, I think it is valuable to explore how I would invest if I were starting out today with the knowledge and experience I’ve gained over the last 27 years.
In retrospect I had a clear bias when I started investing on my own in 1999 known as the Dunning-Kruger effect. I didn’t know enough about investing to know that I didn’t know much about investing.
I still don’t know everything but I do know more. Here is what I would have done and the lessons I’ve learned.
Investing without a goal
I’ve been an income investor for around 25 years but I didn’t start out that way. I first started investing on my own in the midst of the dotcom bubble. The dotcom bubble influenced my decision to start investing on my own.
The media was filled with the narrative that everyday people were getting rich using the new online trading platforms. I wholeheartedly joined this hype driven market and gave little thought to what I was trying to achieve.
I was enthusiastic but rudderless. I had no framework to guide my decision making and no foundation to evaluate if a particular investment was right for me. I bought shares that were popular with other investors and those frequently mentioned in the media.
Part of this was understandable. I was in university and had little real-life experience. It is hard to draw a connection between how investing could improve my life without knowing what I wanted out of life. I just wanted more money.
I’ve since learned the importance of going beyond surface goals and identifying deeper goals. Surface goals are typically reflected in financial terms only – I want a portfolio worth $100,000.
Deeper goals identify the actual motivation for the financial goal - I want a $100,000 portfolio so I can take a gap year and travel. A deeper goal is better motivation because it connects your finances to your life.
Defining deeper goals also allows you to consider other ways of achieving the same thing. Morningstar research shows that 75% of people change at least one of their top three surface goals when connecting a goal to their life.
Flying blind without a strategy
Without a goal I couldn’t come up with a strategy. My current strategy is to build a growing stream of passive income to create financial resiliency and independence. A strategy creates a clear connection between what I want and the types of investments that will get me there.
In 1999 I didn’t have a strategy which meant I had no way to filter through different investment opportunities.
I fell victim to compelling pitches at a time when breathless proclamations about a limitless future were the norm. I did not have the experience or historical context to understand these hype driven cycles constantly re-occur. I didn’t know enough to figure out that this time wasn’t different.
I fell victim to made-up vanity metrics like ‘eyeballs’ and ‘burn rate’ that had little connection with profitability and anything I wanted to achieve in my life.
When the dotcom bubble blew up, I got off the investing message boards and spent my time reading and thinking. Had I been duped because I wasn’t smart enough to invest? Was it my inexperience?
I concluded my lemming like behaviour stemmed from not having a coherent investing world view that I could distill into my portfolio. At heart I’m an incrementalist and favour tangible results rather than an abstract vision of the future.
That is not an indictment of anyone who invests in lower probability / higher reward outcomes. That just isn’t me. Income investing resonated in a way different approaches didn’t. Each dividend increase, reinvestment and new investment is tangible and incremental progress towards my goal.
It is easy to say I should have started an income strategy immediately. But in retrospect it took the dotcom crash and getting to know myself better to find the right approach for me. A personalised approach is the only way to ensure you can follow it consistently over the long-term. I just had to find mine.
Behaviour is the biggest driver of success
I’ve learned a good deal since I started investing. Going through the Chartered Financial Analyst (“CFA”) program and getting my MBA provided the foundational knowledge deemed necessary for an ‘investor.’
I learned about building a discounted cash flow model, accounting rules, and all manner of investing theory. This was useful and trivialising foundational knowledge is a silly exercise even if it is appealing in a populist sense.
However, the academic theory behind investing should be viewed through the lens of its usefulness in your own investing approach.
I’ve come to view the theories behind behavioural finance as more beneficial to my approach than capital asset pricing models. Find your own sweet spot between anti-intellectualism and ivory tower thinking by choosing what insights can be adapted to your situation. Figure out which ones to ignore.
Behaviour plays a far larger role in success than many investors acknowledge. Building sophisticated valuation models matters little if you can’t regulate your emotions.
I learned this by chance during the so-called lost decade of the 2000s. As the dotcom bubble burst I became fixated on growing my passive income.
I measured success primarily on how fast I could grow my income. Inadvertently I isolated myself from many of the behavioural mistakes that plague investors.
I didn’t ignore returns but looking at passive income gave me a more laissez faire attitude to how my portfolio performed on a month to month and year to year basis. Interestingly I outperformed significantly during this decade as market capitalisation weighted indexes struggled while the average share – more representative of my portfolio – did well.
This didn’t make me an investing genius. It was just a time when my strategy did well and indexes performed poorly. Currently market capitalisation indexes are doing well as the giant tech shares and AI names pull the market higher. Strategies like mine which gravitate towards mature and boring companies underperform.
My focus on behaviour and the alignment between the life I want and my portfolio allows me to take a detached view of underperformance. I’m still progressing towards my goals which limits the temptation to chase performance.
If I started investing today with an appreciation of the importance of behaviour I wouldn’t make the mistakes I made in the late 1990s. I chased the narrative of the day about the internet.
I now appreciate that there are always new things that come along that investors get excited about. In many cases this excitement crosses the threshold of rationality. There are differences in each cycle, but the poor investor behaviour is remarkably consistent.
The benefits of experience don’t naturally accrue as you get older. They come from reflecting on the familiar patterns throughout history so you can avoid the perennial investing pitfalls.
Final thoughts
Starting out as an investor today I would have access to more of everything. More strategies and products. More data and news. Everything about investing is faster and cheaper.
The reader asked how I would invest if I were starting out today. The answer isn’t that I would buy radically different investments. It is how I would invest and the structure that would help me make good decisions.
As financial innovation continues and technology advances investing may progressively be getting harder.
The democratisation of data and news makes it more challenging to filter out the noise to focus on what is useful.
A higher volume and wider array of opinions make it difficult to differentiate the biased from the unbiased.
The lessons I’ve learned act as a bulwark against this environment. When I started investing I had no goals, no strategy and no appreciation for how my behaviour impacted my results.
Those may seem like simplistic lessons but they form the cornerstone of any success I will have in the future.
Share your thoughts and email me at mark.lamonica1@morningstar.com
Want to learn more about income investing? I’m doing a series of webinars on income inveting starting 18 August. Sign-up here.
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What I’ve been eating
There are disputes over the origin of several dishes. In our neck of the woods there is the lamington. Greece and Turkey both claim yogurt. Then there is the dispute between Belgium and France over a far superior dish - steak frites.
Belgium points to their invention of frites in the 17th century as the basis of their claim. I’m sympathetic to this argument. Steak has long been consumed and it isn’t a leap to pair it with frites. The French claim they invented it because they perfected the dish. A very French argument.
This version is from Dry Dock in Balmain. Dating from 1850 the pub reopened after a two-year renovation in 2023. The food is excellent - just don’t expect to pay pub prices.
