Tuesday, April 19, 2016

Quitting Your Job to Become a Full-time Investor and Then a Successful Investor

Quitting your job to become a full-time investor may look like a great and romantically appealing idea to many people.

The key assumption that is generally made is that once you become a full-time investor you would then eventually and surely become a successful investor.

This is a dangerous assumption.

Quitting your job under the above assumption is a risky proposition, to say the least.

It seems Warren Buffet's success as an investor has a lot to do with investing being viewed as a surefire way of becoming not only rich but super rich.

Stories glorifying investment successes of Warren Buffet and others of his ilk have been portrayed by the media in quite an adoring and compelling manner.

However, these stories are under the effect of survivor bias and hence leave out the scary side of full-time investing.

An important realization is that the journey from having a job to quitting it to become a full-time investor is indeed a tough one but the journey from being a full-time investor to a successful investor is much tougher.

It is a commonly accepted fact that it is hard to distinguish between the role of luck versus skill as far as investing goes.

In addition, even the high and mighty go through peaks and troughs which necessitates equanimity as a key trait of a successful investor.

And lastly, it is useful to always remember the importance of making mistakes and learning from them.

This is explained so beautifully well in the Letter to Shareholders by William A. Ackman (Bill Ackman) in the 2015 Annual Report of Pershing Square Holding:

"I have always believed that experience is best defined as making mistakes and learning from them. I have made many investment mistakes over the last nearly 25 years managing investments, but the overall result has been quite satisfactory. I believe that this is principally because we have used errors of judgment, execution, or analysis as important opportunities for study, learning, and introspection. We intend to do so here.

Now that we have begun to stabilize our investment in Valeant, we will begin to consider the significant lessons that we can learn from this experience. One important lesson from the past is that while we normally use our active investment approach to create value in a new situation, it can also serve in a defensive role, when a business we own encounters severe challenges."

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