The biggest mistake I made as investor

If possible - avoid it

This post is a reflection of the biggest mistake I made starting out investing. I had a good understanding of finance and accounting, I knew how to read the financial statements, I could see if the share price went up or down, calculate some ratios and indicators, and I thought I had all the tools I need to be a good investor.

Of course, that wasn’t the case, but how could I have known? Also, what else is there to learn?

Here are the two key elements I missed:

1. Understand the management team and culture

2. Understand the business & broader environment

Let me illustrate the importance of both of these through a story (or two):

Imagine someone comes to you with a business idea, and asks you for $10,000 for 40% of it - Would you invest in it?

Probably the two questions you have are:

1. Who is this person?

2. What is the idea?

You’d be evaluating these two questions a lot. If the person in question was someone you know for bad actions, misleading friends and family, and many failed ventures, you probably have your answer already, and the idea is irrelevant.

However, if it was someone you knew that has integrity and many successful ventures, then you’ll probably continue by asking questions about the idea itself. The goal of the second part is to understand the business, the broader environment, and figure out if all of it adds up.

Yet, when I was researching companies, I didn’t ask these questions, especially not the first one. I was focused on the financials of the company in question.

So, how is this related to the stock market? Well, a public company is nothing else but a company that has grown in size. There are still individuals running it, and it still needs to have top leaders to lead it in the right direction.

Now, I did mention culture as well, and there is a reason for it.

I’m sure many of you reading this post have been part of a company where the manager was just a terrible person. Whether he/she was not showing respect to someone, being rude for no reason, demanding more hours than one should expect, or not letting you be creative (unless you are an accountant, then please do not get creative), it doesn’t matter. Ultimately, you don’t have good feelings about that company, and it is unlikely that you saw (or see) yourself spending your whole life working there, and rightfully so. Would you invest in a company that is run by a manager of that kind? Probably not. You would not care about the financials, as you know it is likely a company that will not prosper in the long run. There will be many demotivated employees, high turnover, low innovation, and why would you invest in it?

Let’s reverse the equation in the spirit of Charlie Munger. What is the easiest way to destroy a company? Probably the opposite of the two above:

1. Have a bad management team and bad culture.

2. Have a poor business operating in a challenging environment.
   

Yes, the financials of the company are definitely important, however, similarly to the first example, without these two key elements, the financials are irrelevant.

Do not make the mistake I made early on. Make sure your research process includes these two key elements. I do think that this growth is the natural path of any investor.

I hope you enjoyed this post.