Find your way and press "Play" (Part III)
The new passion for the financial markets finally led me to my favorite investment book:
"What Works on Wallstreet" by James P. O'Shaughnessy
My first impression of the click-baity, catchy title was that maybe I should not expect too much from it. I already had read some books which provided investment formulas based on cherry-picked data and outdated short-term studies. I was of course already aware of simple price multiples like Price-to-Book, Price-to-Sales and Price-to-Earnings. Why should it be different this time.
However, I was completely overwhelmed by the sheer power of this book. For the first time on my investment journey, I had the feeling that there was such a thing as "evidence". No anecdotes, just data. No hand-picked, outdated 5-year studies, but a comprehensive analysis across different stock universes and several decades of stock market history. Not just simple average performance but detailed statistics, charts and versatile points of view. And all that written in plain English without excessive academic geek-speak.
I immediately knew: "This is the path I want to follow". Almost an epiphanic realization. I wanted to create a rules-based multi-factor stock picking approach which is tailored to my personality and investment philosophy. Shortly after, I stumbled over Gurufocus.com and was convinced by their service as data provider. So I had the basic idea and the data but no actual system yet. I never learned how to code and asked a colleague at the institute for help. He wrote a basic ranking program in Matlab for me, which I refined later on. I had everything in place. The philosophy, the strategy, the code, the data. I just needed to start.
Unfortunately, my mind wasn't ready for this task. During the creation of the setup I forgot that deep inside me I was still a moron. In late 2018, I sat in front of my ready-to-use system and kept finding excuses why it is not the right time to start:
I need a new brokerage account first!
We are almost 10 years into a bull market, I can't go long now! I should wait for the next crash and invest at the bottom!
I need to save more money first!
I need to improve my model and learn more first!
I wanted to bridge the waiting time by doing some small trades.
WHAT COULD GO WRONG?
So I did what every good Value investor does: I shorted Tesla! And believe it or not, quickly the position went in my favor. I felt like a king. And I looked for the next shorting opportunity. We approached the December lows in 2018 and I heard my inner devils screaming:
THIS IS IT! THIS IS THE BIG ONE! NOW OR NEVER! SHORT AND DOUBLE YOUR MONEY AND AT THE BOTTOM, START INVESTING IN YOUR SYSTEM!
I started listening to doomsayers. I subscribed to Peter Schiff's podcast and felt like the smartest guy in the universe. At the exact low of the markets, I shorted Netflix and all my paper gains of the Tesla trade were wiped out in an instant. I could not sleep for two days and kind of felt stupid but then I realized: I did not lose anything yet. High leverage positions in volatile markets get wiped out frequently. C'est la vie. But all the "data", all the news screamed for a further crash. So I made a plan.
I said to myself: I am willing to lose 20% of my net worth on this call. If I am wrong I lose 20%. I can live with that. But if I am right, I can potentially double my money! Long story short: I shorted the whole 2019 rally. Perfect negative correlation between my portfolio and the markets. I lost 1000€, doubled down, lost again, doubled down. I felt like in a trance. I found explanations to keep piling shorts. Until one day everything inside me broke down.
I can't exactly remember what triggered my capitulation but I can exactly remember the feeling. This shocking anxiety, the shaking of my whole body. All my senses switched to full alert mode in an instant. I not only realized that I blew 15% of my net worth but also that I missed one of the steepest rallys in the history of the stock market. Counting that in, my opportunity cost was not 15 % but almost 30%. I could not work, I could not concentrate on anything, I could not sleep. Fortunately, I had a 2 weeks vacation in which I kept shaking in anxiety and wriggled in bed with nightmares.
I did not understand. I never had this feeling before. I missed the whole 2008 to 2018 bull market and did not feel a thing and now I lose “some money” and go crazy about it? The simple answer would be that I just can't stomach a huge drawdown or tracking error in my portfolio and that I should go for index fund investing instead. But I am too stubborn to accept that as an explanation. I had lost money before. Much money. Both in absolute terms (by my standards) and as a percentage of net worth.
There was a simple difference now: This time I should have known better. Instead, I betrayed my own believes and traded against my investment philosophy.
The first time in my whole investment career, I have studied and worked hard. I found my strategy and my philosophy. I created a system, a program, a plan. And then I betrayed everything it stood for by doing the same stupid mistakes all over again. I not only lost money, I lost money by acting against my own investment philosophy. In fact, I can save the money I lost within 4 months with my current salary but the pure regrets and disappointment with myself broke my mind. However, I did not capitulate. In fact, I even had a “trading relapse” in 2020, however, this time with side money and my main money in place. Still, stupid in hindsight, but with each setback I feel that I get more resilient.
To find your way you have to seek, learn, test, create, interact and work hard. To finally accept your way maybe you have to betray it first. I am sure that someday in the future I will look back to this journey as one of the most crucial episodes in my life. What doesn't kill you makes you stronger. Since April 2019, my long-only stock investment system is running and it will never stop again.
Thanks for reading,
Your Non-Prophet Investor