Years 0-1: Buying What I Knew
Like most people, I started off with a blank slate and a vast appetite for making money quickly. My initial strategy was to buy companies that I knew, such as Apple, Nintendo, Microsoft, etc. However, after a year of holding, I quickly grew disillusioned with these slow moving cash cows, and after cashing out and realizing a small profit, I started to research stocks that I thought to be “under the radar.”
Years 1-2: Trading BioTech Equities
This stage of my investing journey was when I paid my tuition to the market. I believe the most dangerous idea an early participant in the stock market can form is to believe they have an edge when there is actually no edge apparent. Insufficient research and conviction will lead to panic selling and large losses at the earliest stages.
This was the stage where I would read a few SeekingAlpha articles on cheap biotech companies that had oftentimes suffered severe drawdowns. These articles would cherrypick statistics to paint the company in a positive light, or exaggerate the effectiveness of a potential drug candidate, for example. After reading these articles, I would be in awe that the companies traded so low and would instantly make a purchase before doing any fundamental or technical analysis and solely based on facts in the article. You can guess how that ended. However, with a stubborn personality like mine, I kept on believing the false notion that I somehow had an edge on biotech stocks until I lost a majority of my money.
Lesson Learned: Don’t fight the trend, follow it. Cheap companies are cheap because they are of low quality; expensive companies are expensive because they are of high quality. Dollar Store vs. Gucci Store. Also, biotech stocks are hard to trade. Very hard. A great biotech fund to follow are the Baker Bros, if you’re into that. They manage 23B AUM and own 126 holdings.
Years 2-2.5: Trading Options
After taking staggering losses in Years 1-2, my stubborn self still wasn’t ready to give up. After hearing about options through the internet, I decided to try my hand out. I was still in the “get rich quick” mindset, and options seemed to be the perfect way to achieve that with their high, leveraged returns. Options are extremely complicated, and I would recommend studying for at least 2 months and paper trading before committing to the real thing.
Long story short, I increased my account at the time by 200% within 3 months of starting to trade options. I was ecstatic and thought that this was my golden ticket to a life of luxury; no more 9-5 and trading all day seemed closer than ever. Again, you can guess how that happened. After being up 200%, the next month my account promptly went down 90% after a market correction occurred; my portfolio was solely invested in short-dated call options.
Years 2.5-Present: Investing and Finally Getting the Hang of Things
After large drawdowns and losing most of my money that I invested, my “get rich quick” ego was hurt and beaten down. I was ready to pursue the long game, although I still believed I could outperform the market. I wasn’t yet ready to just buy the S&P 500 or NASDAQ 100 and take it easy.
This is where my breakthrough occurred. I realized common stocks provide the best risk to reward ratio over the long term, and that investing SHOULD be boring at times. I realized that hedge funds and institutional investors file a 13F every quarter detailing their portfolio and holdings. If anyone has an edge, it’s the people with multimillion and sometimes billions of AUM. Of course, it isn’t wise to blindly follow someone’s investments. There are several fundamental statistics one should look at before making a purchase, such as revenue growth/retention and free cash flow (FCF) margin. I highly recommend reading a company’s annual 10K form before making a purchase; you will pick up insights about the company that would not have been grasped by just reading an article online written by an external source.
I haven’t traded options since Year 2.5. I have nothing against them; it’s just that the risk/reward aspect isn’t there for me. I’ve been very successful in buying right and holding tight. However, it’s important to not get emotionally attached to your holdings and to be flexible in adapting to growth slowdown or company thesis changing events. As a growth investor, I want to invest in the best companies with the best revenue growth rate quarter over quarter and year over year.
P.S.
Twitter is an extremely beneficial resource with hundreds of reputable professionals in the investment field. Altimeter Capital, a successful hedge fund that has helped take Snowflake, Twilio, and Roblox public, has 4 members of their team who are active and post free data and analysis, including the founder, Brad Gerstner. Links to their Twitters are below:
For Your Eyes Only - Hedge Fund Insights