The evolution of an investor - Which level are you?

Discover how to level up

I believe there’s a common journey (or evaluation) of an investor. We all start by knowing absolutely nothing about analyzing companies or investing in general, but we get better over time, as we accumulate knowledge and experience.

Level 1: The Noob

At this level, the focus is solely on the share price and its past performance. So, when the share price goes down from $100 to $30, the noob investor would conclude that now, the stock is cheap and buying is the right thing to do. Of course, this doesn’t have to be the case. In fact, public companies that went bankrupt went on exactly this trajectory. There are plenty of reasons why the share price could collapse, and this decline could be justified. However, the noob investor isn’t aware that there are many questions that one should ask.

In addition, at this level, there’s a tendency to follow the crowd and the opinion of others, which is often times a really bad idea. However, without any knowledge and experience, the opinions of others oftentimes sound logical and smart.

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Level 2: The Enthusiast

The enthusiast has heard that there’s more to investing than just the share price. You’ve started exploring financial statements, and you’re learning the basics of accounting. For the first time, the income statement, balance sheet, and cash flow statement start making sense. I’m sure everyone can recall that time when you could read the financial statements and understand what they meant. It comes with a confidence boost, and it is normal to think “Ah, I’ve got this investing thing figured out. It’s easy!”

The catch is – even though it feels like a superpower, this is still the beginning. Financial statements provide information about what happened, not what will happen. Understanding them is useful, but not enough to be a great investor.

But at least now, you can actually challenge some of the opinions of others.

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Level 3: The Seeker

This is where one is moving beyond the basics. Now you’ve learned that there are various valuation techniques, that allow you to figure out what a company is worth. It gets exciting! This is where you get introduced to the EBITDA and P/E multiples, relative valuation, dividend discount model, and DCF. All of these can be powerful tools, and they’re one piece of the puzzle to understand if a company is undervalued or not. At some point, you will likely stick with one or two models that work best for you.

But here’s the problem. Having the tools isn’t the same as knowing how to use them. At this stage, it is common to have fancy spreadsheets with inputs that aren’t supported in any meaningful way other than historical financial data. Basically, garbage in – garbage out. You might not be aware of the disadvantages that come with the various models and fall into some of the common traps.

However, it doesn’t feel that way. When you spend hours gathering data and filling in your inputs, it feels like a new superpower, because in the end, there is an output. You have estimated the value of a company, and now you can compare that with the market price.

But, if your assumptions about growth rates, the discount rate, or margins are significantly off, your valuation is meaningless. In fact, there’s a chance it harms you more than it helps you.

By the way, everything that I’ve mentioned until now can be 100% automated. So, up until this level, you have no advantage over a relatively simple algorithm.

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Level 4: The Thinker

At this point, you understand how important the inputs are.

Therefore, the focus shifts a bit more towards understanding the industry, and the broader environment, and asking the right questions so that the input is more solid.

For example, if you are analyzing a car company, you might want to understand if there’s a trend regarding EVs, if there are any regulatory changes that will impact your margins, if the company needs to invest more to expand its capacity, etc.

This is when research becomes your best friend. You’re no longer just looking at the company in isolation—you’re connecting the dots between the company, its competitors, and the broader environment. Storytelling also becomes a part of your process, as now you’re not just crunching numbers—you’re building a narrative about the company’s future.

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Level 5: The Pro

This is the pinnacle of investing and where intangibles come into play.

I don’t mean goodwill and patents. I mean the management team and the company’s culture. The key questions here are:

• Is the management trustworthy?

• What is its track record?

• What is its vision?

• Is there a culture that can survive tough times?

Culture is an often-overlooked factor in investing, but it’s incredibly important. As the saying goes, 'Culture eats strategy for breakfast.' A company with a strong culture can attract and retain top talent which is a must for being a great company.

What I find interesting is, that if you are to invest in a private company, you’d get to level 5 sooner than if you invest in public companies.

Here’s an example. Imagine someone walks up to you, and offers you to invest $10k in his company, and in exchange, you’ll have 10% of it. The first question that you’ll have is: Who is this person? If the person in question was someone you know for bad behavior, 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 who has integrity and many successful ventures, then you’d probably continue the conversation by asking questions about the idea itself. Your goal would be to understand the business, whether it can survive in the environment, and what return can you expect from it.

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I hope you enjoyed this post and wish you great success on your investing journey! Do you recognize these levels in your own progression?

Which level resonates with you the most—and what steps will you take to reach the next one? Share your thoughts in the comments—I’d love to hear your story!