An all too common investment story

This is a story about Julian.

Julian is a keen individual investor, he’s been at it for a few years and he’s enjoyed good returns along the way. He loves researching stocks alongside his 9-5, where he works full time as a product designer.

Since he has a full time job, he hasn’t the time to undergo an A-Z trawl of a random European stock exchange on a Tuesday morning (as much as he, and we all, would love to). Considering this, he subscribes to various stock research newsletters to gather ideas, and following the newly accepted wisdom1 among investors, he uses a mixture of company websites and Claude AI to research those gathered ideas.

On Sunday mornings, Julian wakes up with some coffee to receive his weekly dose of investment ideas. There was one Sunday, however, that was slightly different.

He received his typical emails from his two favourite investment newsletters. But this week something intriguing occurred — they both pitched the same stock, let’s call it BTC Corp. Typically, he’d be overjoyed at this vote of confidence — “these two know what they’re doing” he’d tell himself — but that wasn’t the case this week. Unfortunately for Julian, one email presented a very compelling buy recommendation on BTC Corp, the other presented an equally compelling sell recommendation on the stock.

His two favourite places to find ideas were so confidently disagreeing with each other.

He keenly reads and believes their commentary to be correct, but of course in this case, one had to be right and one had to be wrong; this sparked an uncomfortable and confronting cognitive dissonance in him.

Any other week he’d have been lulled into their persuasive language, the attractive prospects, and of course the promise of profit that the email offered. But now knowing that one of these two investors had to be wrong, he approached them both with far more skepticism. When hope and promise was removed from the equation, he saw things a little more objectively.

And so he sat, sipping on his coffee, pondering over the dilemma of who was to be right. As any good ponder does, it struck Julian with an insight. He came to the realisation that had he only received one email, say, from the investor going long, he’d have also been long BTC Corp. In the same vein, had he only received the email from the short investor, he too would’ve been short BTC Corp. Much like a cosy fire goes with a good film, a harsh truth comes with a little wisdom. Julian remembered that a stock pitch is a product of the investors’ unique perspectives, knowledge, and biases. It’s not gospel, nor is it necessarily the same conclusion he might’ve arrived at given he’d undergone the same research process; it’s a game of opinion, he’d just stopped treating it as such; realising he had unintentionally outsourced all of his own thinking, he begun to second guess all of his investments. He noticed that he’d developed a few bad habits. When his companies released news, he wouldn’t go on the company website, he’d rely on people on the internet to do everything for him — he wanted all the important stuff packaged and sent straight over in a neat email. But now, reminded of a concept he knew well as a beginner, he understood every bullish argument for each of his stocks likely had an equally compelling bearish argument against it. In fooling himself into thinking he was doing his own research, he fooled himself into thinking he knew what he held. All he knew was someone else’s opinion on his holding, not his own — this made him rather portfolio-conscious. And with his new found self-consciousness, he went through each of his holdings and researched them for himself, all over again. He promised therein to use social media as a form of idea generation, not as a neat hack that allows one to stop thinking and researching.

And so Julian took the final sip of his Sunday morning coffee, maybe a few pennies poorer and a little sheepish, but a whole lot wiser — and definitely a better investor — for it.

Across Substack, Twitter, and the vast number of dedicated stock research platforms, we are inundated with golden tickets, sure things, and early stage 100-baggers. It starts to feel like every stock is a once in a lifetime buying opportunity. Being barraged by so many ideas on a daily basis, it’s rather easy to forget to find any ideas of our own. Why trawl through an index when there’s 15 emails in your inbox, all promising retirement in three years?

Don’t get me wrong, there are lots accounts across media that have consistently proved themselves to be highly valuable and talented investors, but statistically speaking, only a few can be. When you find one, hold on tight… because there are hundreds of accounts claiming to have achieved above average returns for 10-years plus ( who definitely have not). We can’t forget that more than half of road users think they’re above average at driving…

Statistics have a fantastic way of unapologetically revealing the truth. Unfortunately, we can’t all beat the market.

In outsourcing our thinking, we take away something unique from an investment proposal: ourselves. You have knowledge and perspectives that others don’t have, and you give that up when you leave research up to someone else. As I’ve said, there are no doubt many talented investors on social media — I can vouch for a few off the top of my head — but it is the exception that proves the rule. Investing is hard and only a few are extraordinary. In listening to the ideas of the many, you’ll end up with average returns. Don’t forget that these people will have approached the idea with their unique skillset, and undoubtedly their skillset has gaps. The long investor missed out on the accounting flaw that the short investor knows very well, and the short investor missed the growth avenue that the long investor has spent years studying.

Each investor has his reason to position themselves the way they have done. If you’re to follow someone into something you have to be fully aware of their reasons, so much so that you are not following them into it at all, but rather investing in the same thing as them, the difference is subtle but important. When you take research seriously you stop following people into things and you start leveraging their knowledge to benefit your own. External research is supplementary to your own — it is not yours.

If there’s another reason today to encourage you to read that annual report yourself, it’ll be this:

Remember you’re buying from someone who wants to sell, or selling to someone who wants to buy. You’re making a bold claim that you disagree with the other person so much that youre willing to put your hard earnt money on it. Surely a bet like this deserves extremely careful thought and research, not just a few minutes reading another persons potentially one sided research? We’d like to think all available research is conducted with the highest level of vigour — but we can’t know it for sure — the only true way to know the quality of someone’s research is to also do it ourselves alongside them.

If you don’t research ideas for yourself, like our good friend Julian, everything becomes a matter of persuasion. A stock pitch is less about merit or inspiration and more about salesmanship. It’s like when you go to a mechanic with your rickety car that you know nothing about; with enough big and scary words you’ll be spending thousands on parts that don’t need replacing.

Without knowing what you’re doing, you become convinced not by the right thing, but by the first thing. If you read the bullish argument first, you’ll be skeptical of the upcoming bearish argument. Likewise, reading the bearish argument first, you’ll be far more likely to disagree with the bullish argument. This susceptibility to salesmanship will make your investment lifetime a dreary one. The only answer is to do your own research and compliment it with other people’s research. People are clever, make use of them, but don’t rely on them.

It’s more than likely that we’ve all been — or still are — investing like Julian. To become a better investor, it’s absolutely vital to break this spell of delusion — that we know what we’re invested in.

By all means, utilise the fantastic research that the platforms have to offer — you’d be silly not to — but don’t forget the most important thing, which is that you have made up your own opinions about a stock’s prospects and are not just borrowing someone else’s ideas. Only when it’s far too late will you realise how fragile borrowed opinions are. I say this from experience, too much of it. There is no kick-up-the-ass to research a stock like being 50% down on it… Don’t be that guy.

Know what you own, use research platforms as a supplement, not a crutch.

After all, is this not why we invest? It’s not just about money, it’s because we love doing it, we love the process, so let’s start doing it again.

This was short one today, but it’s a discussion that’s been on my mind for a while and I thought I’d write about it. I hope you still got a few insights as normal.

Have a great Sunday and I’ll see you next week.

Best,

The Intellectual Edge

References:

Andy Warhol — Campbell’s Soup Cans (1962)