Vitaliy Katsenelson’s Contrarian Edge: What to tell a new graduate about investing in stocks

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College graduation ceremonies this time of year remind me of my own graduation from the University of Colorado in 1997.

I felt completely lost, with no idea what to do next. Now, more than 20 years later, I can offer some experience-based advice about investing and how to go about it realistically. Here’s what I would tell my younger self and his generation:

1. Find yourself. Investing is like a piece of tight clothing: Just because it fits and looks good on someone else doesn’t mean it’s a good fit for you. Your investment strategy has to fit your personality; it has to wrap around your biases and life experiences. You’ll only discover your strategy, the one that fits your personality, when you start putting real money to work.

2. Just do it. The best way to learn about investing is by doing. Don’t create paper portfolios. Take as much money as you can afford to lose (because you may lose it), and invest it. The most difficult part of investing is staying rational when you get punched in the face by the markets. Understanding the emotions that losses and gains evoke in you and dealing with them is incredibly valuable.

Don’t focus on building a properly diversified portfolio. Your initial focus should be stock analysis, not portfolio construction. You simply won’t have enough time to do the deep research necessary to build a diversified portfolio of 15 to 25 stocks. At this point in your career, depth is more important than breadth.

3. Invest, don’t gamble. Do the analysis with the diligence and care that you would bring to investing your parents’ retirement savings. Document your research. Imagine you are working as an analyst at a mutual fund and writing a pitch for a stock to a portfolio manager. You’ll learn a lot from documenting and writing up your research. This will keep you rational.

Browse investment writeups on ValueInvestorsClub.com. This website was started by Joel Greenblatt — a terrific investor who wrote The Little Book That Beats the Market and You Can Be a Stock Market Genius. (Both highly recommended books.) This is where you can learn what the depth and rigor of your research needs to be. Writeups here are posted by diehard value investors, not academics, who put their money where their mouths are.

4. Start with what you know.  What stocks do you analyze first? Recently I was asked this question by a fellow who had undergraduate and graduate degrees in aerospace engineering. What do you think my answer was? I said “You probably know more than most people your age about the aerospace industry. Create a map of the industry and then learn about each company in the industry.” It is easier to start analyzing something you already understand.

5. Learn to say ‘I don’t know’. You cannot be expert in everything. Someone who has an answer for everything probably knows very little. Saying “I don’t know” requires honesty and self-confidence, and it opens doors for learning.

6. Make investment friends. My life over the last 20 years has been enriched by having great investment friends around me. Today my investment friends are really just my friends, with whom I share and debate stocks, though we also talk about family, kids, and such.

Investing doesn’t have to be a solitary, sterile journey; in fact it should not be one. Every investor, without exception, will go through a period where he or she feels like a complete idiot — the market will do this to you at times (trust me on this). Surround yourself with loyal, humble investment friends who can give you support, and who are smarter than you, so you’ll always be learning from them.

7. Read. These books have been helpful to me:

•  Fooled by Randomness, by Nassim Taleb, which will make you deeply appreciate the role randomness plays in investing.

The Essays of Warren BuffettBuffett’s annual reports edited into a book by Lawrence Cunningham.

Poor Charlie’s Almanac, to understand the second half of Berkshire Hathaway BRK.A, -0.12% BRK.B, -0.07%  — Warren Buffett’s partner, Charlie Munger.

•  Basic Economics,   by Thomas Sowell, which has taught me more about economics than all my economics classes combined.

Margin of Safety, by Seth Klarman — one of the most brilliant investors of our time. Though the book is out of print, you can find it online if you’re resourceful.

The Most Important Thing Illuminated, by Howard Marks, which is filled with Klarman-like wisdom.

• The “Little Book” series: The process of writing one of these books made me appreciate the series even more that I did already. These books are typically written by investors who often have taken their “big” books (as I did) and simplified and condensed them into smaller, more accessible works. This process of simplification and condensation forces you to keep what matters the most. My two favorite books in is series are The Little Book of Behavioral Investing, by James Montier, and The Little Book That Builds Wealth, by Pat Dorsey.

Reminiscences of a Stock Operator, written in 1923 by Edwin Lefevre, tells from a first-person perspective the fictionalized tale of the early years of the great trader Jesse Livermore. It is rumored that this book was actually written by Jesse Livermore and edited by Lefevre.

This book provides a great introspective look inside a trader’s mind and teaches many behavioral and common-sense lessons. My favorite edition is the one annotated by my friend Jon Markman. His annotations are like a book within a book; they take you behind the scenes of Lefevre’s story and give important insights into the key characters and the backdrop of that interesting time period.

I don’t want to end with empty platitudes, but I’d be remiss if I didn’t stress the importance of having an unstoppable, insatiable thirst for knowledge. Learning doesn’t cease when you graduate; it continues and never stops. As I look at my investment role models, all them, without exception, have that quality. If you don’t have that thirst, cut your losses and find another career or hobby. A value investor needs to have a growth mindset.

Now read: A retired top executive says this killer question will kick-start (or reboot) your career

Vitaliy Katsenelson is chief investment officer at  Investment Management Associates  in Denver, Colo., which has no position in any of the stocks mentioned in this article. He is the author of “Active Value Investing” (Wiley) and “The Little Book of Sideways Markets” (Wiley). 

What is value investing? How is it applied in the modern markets by investors like Warren Buffett? Check out “The 6 Commandments of Value Investing,” a chapter from Vitaliy Katsenelson’s upcoming book.

More: These 16 money wasters are why so many Americans can’t save for retirement

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