Successful Investing (Part 1 - Passion and Common Sense)

Many investors (including myself) love hot stock tips, but I’m a big believer in “know what you do” theory. Therefore, I will try to avoid talking about any particular stock (at least for now), and instead I’m going to focus on the fundamentals of investing. I also believe that successful investing is more like a marathon sport than 100m sprint race. This article series could serve as a framework (or philosophy if you will) for your investing career.

The first two things that are crucial for successful investing are passion and common sense.

1. PASSION

Passion is a great motivator. Passion will make you give your best effort even when no one is watching or even when you don’t get compensated fairly (at work). It will also helps you to keep going when things get rough, and you will need it as things will definitely be difficult from time to time (either bad business result, recession, or having to analyze a lot of 10Ks in a short period of time etc). You will need to have an interest in the fundamental of investing, and not just to the idea of making money or the money itself. The fact that you are reading this article tells me that you are at least semi-passionate which I think is a good start. If you don’t think you are interested in the fundamental of investing (and business in general), then investing in individual stocks might not be for you. Interest can be stimulated, and as for most situations there will be times where we were introduced to something for the first time. So if you are not familiar with Investment topic, it doesn’t automatically mean that you are not interested with investment. So the first rule is, be passionate about investing!

2. COMMON SENSE

Next is “Common Sense”, which I think the most important criteria. In my opinion, this is even more important than IQ or EQ. Common sense is defined as a sense that is common to others. Common sense will help you deal not only with investment decision but with all other aspect of life as well (except on love, where common sense doesn’t seem to matter, but I won’t even go there now).

Common sense is tough. Tough in the sense that you don’t get to choose whether you have it or you don’t, as claimed by many, that common sense is innate and more like a tacit knowledge which is probably impossible to teach or learn. Warren Buffett said, “Either the idea will get to you right away, or you won’t get it even it is explained many times” (From Andrew Kilpatrick’s book titled “Of Permanent Value”). Another example is Mark McCormack (In his book “What They Don’t Teach You at Harvard Business School”) said that common sense is the best personal asset in business. He also said that “Either you have it (common sense), or you don’t”.

It’s hard to explain or give a concrete example of what common sense is, but all I can say is, from my experience, common sense helps me to identify the bad deals, and deals that are too good to be true. It also helps me to identify risk, decide which risk I want to take, and also make the right trade off, or the right call (though sometime on paper alone or based on all the analysis, I should have done the opposite).

Because of my interest in helping others to be successful investors, I choose to believe that in some ways common sense can be learned (otherwise it is unfair). For those who feel they lack of common sense, my recommendation is for you to learn (as practice makes perfect) why a certain people that has great common sense (like Warren Buffett or Peter Lynch for example, or someone you know) makes a certain financial decision. You can start learning common sense on basic financial topics such as rent vs. own, buy vs. lease, save/invest vs. spend now, fixed mortgage vs. ARM vs. Interest only vs. option ARM, taxable account vs IRA/Roth IRA, and so on so forth. Understand the trade off (and the mechanics of the trade-off, instead of just the facts) and which situations will better on which situation (if the decision should indeed vary based on a particular situation or condition). And if you can only remember one thing from this (trade-off) learning exercise, try to remember that there ain’t no such thing as a free lunch.

I was learning myself as I grew up. My dad used to ask me common sense topics when I was a teenager. One example is when we went to a restaurant for a family dinner, he asked me “Do you think this restaurant makes a profit?”, “How much revenue and profit/loss that this restaurant have in a year?”. So instead of enjoying dinner right away, I have to start making observation and gather data (how many seats in the restaurant, how many people come per day, rental cost, and all other drivers that are needed to compose the answer), and then making calculation in my head. Of course, at first, I used to give a standard answer, “Yes, they do make profit, because otherwise they would be closed by now”, which at that time I think is a decent answer, but I didn’t get away with that (instead I got a knock on my head, and a hungry stomach).

So the second rule is, have some common sense!

Part 2 – to be continued…

What does it take to be successful in Investing?

Regardless whether you are currently performing well or badly in the market, I'm sure that most of us have asked ourselves, "What does it take to be successful in Investing?"

For the last 10 years, I believe I've experienced almost all of the possible situations that can happen in the investing world (all the ups and downs, and the ins and outs). Thankfully, I never have to file bankruptcy nor having any significant debt.

In the next few weeks, I'm going to share to you 6 important things (in three separate articles of 2 + 3 + 1 topics each) that I have learned in the last 10 years that I think will help you to be successful in Investing. I wished I had someone taught me these things 10 years ago, but I'm not that lucky. Having said that, now I am glad that I can help others now. But as some people might say, learning the hard way is sometime the best way to learn.

Just to set the expectation, these aren't turnkey systems or programs where you can just easily do A, B and C and then you are done, but these are more of a framework and basic skills/traits where you will need to develop and work on.

Sounds fun?

Stay tuned!