October 13, 2024 • 1hr 23min

TIP668: What I learned About Investing w/ Stig Brodersen

We Study Billionaires - The Investor’s Podcast Network

In this episode, Stig Brodersen reflects on 10 key lessons he has learned about investing since starting The Investor's Podcast in 2014. He shares insights on developing an investment strategy, managing biases, portfolio construction, and more. In the second segment, Clay Finck joins to discuss his top investing lessons as well. Stig provides context that when he started investing and podcasting about it, he had an inflated view of his abilities and thought he could be the next Warren Buffett. Over the past decade, he has been humbled by the markets and gained wisdom on developing a more thoughtful, personalized approach to investing.

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Key Takeaways

Be careful who you listen to about investing - Focus on your own goals and find investors with similar strategies to learn from
Don't screen for stocks - Screening can force action into low quality businesses outside your circle of competence
Your circle of competence is likely smaller than you think - It takes thousands of hours in an industry to truly understand it
Read investing books, but study real businesses - There are diminishing returns to only reading investing theory books
Set up guardrails for yourself - Understand your biases and set rules to protect yourself from yourself
Don't look at your track record too often - Looking quarterly can lead to short-term thinking
Don't only have public equities in your portfolio - Diversify across asset classes for protection
Run your track record 1000 times - Consider how your strategy would perform across many scenarios
Be thoughtful about position sizing - Have a framework for initial positions and scaling up
Understand the implicit assumptions in advice - Consider the background and circumstances of those giving advice

Introduction

In this episode, Stig Brodersen reflects on 10 key lessons he has learned about investing since starting The Investor's Podcast in 2014. He shares insights on developing an investment strategy, managing biases, portfolio construction, and more. In the second segment, Clay Finck joins to discuss his top investing lessons as well.

Stig provides context that when he started investing and podcasting about it, he had an inflated view of his abilities and thought he could be the next Warren Buffett. Over the past decade, he has been humbled by the markets and gained wisdom on developing a more thoughtful, personalized approach to investing.

Topics Discussed

Be Careful Who You Listen To (2:12)

Stig emphasizes the importance of being selective about whose investing advice you follow. He recommends:

Focus on your own goals rather than comparing yourself to others
Find investors with similar strategies and holding periods to learn from
Look for those with public, audited track records
Pay attention to how others define their track record (e.g. including private investments)
Remember even great investors can often be wrong

He notes: "The better track record they have, the more I pay attention to what they were saying. Now, this doesn't mean that, say a 10% CAGR investor can't be better than a 15% investor. It might simply mean that he's unlucky. But you have to go over the odds and have an idea of how they achieved that track record."

Don't Screen for Stocks (7:45)

Stig advises against relying heavily on stock screeners, as they can lead to investing in low quality businesses outside your circle of competence. Instead, he recommends:

Look at portfolios of investors you respect as a starting point
Reverse engineer their process and thesis
Focus on businesses within your circle of competence

Your Circle of Competence is Likely Smaller Than You Think (8:29)

Stig shares that his circle of competence has shrunk over time as he's realized how much depth of knowledge is required to truly understand an industry or business. Key points:

It takes thousands of hours studying an industry to develop real competence
Reading public filings is not enough - you need deep industry experience
His portfolio is focused on just 3 areas he's spent significant time in
Be honest about what you truly understand vs. what you think you understand

He notes: "I come to realize that my track record has shown that unless I spent, I'm really sorry to say, thousands of hours in a specific industry, I've triple just not been very successful."

Read Investing Books, But Study Real Businesses (11:31)

While Stig still reads investing books, he's found diminishing returns compared to studying real businesses:

There's conflicting advice across investing books
Reading 10-Ks and studying real businesses is more valuable
Read business books about specific companies
Study businesses you find fascinating, not just potential investments

He reflects: "I still enjoy reading. It's not because I have any regrets of that, but I do think I have been inefficient in my reading and at least from an investing perspective, I would probably benefited more if I spent that starting real businesses instead."

Set Up Guardrails for Yourself (16:05)

Stig emphasizes the importance of understanding your own biases and setting up rules to protect yourself from yourself:

Understand how you're wired and set up rules accordingly
Example: Investing in a fund that can only be redeemed annually to force inactivity
Example: Capping initial position sizes at 10% of portfolio
Set up guardrails that allow your biases to work for you instead of against you

He notes: "I want to set up guardrails to protect myself from myself and we all unique creatures, and I can't tell you how you should set up guardrails, but I do know it's very hard to change the way you are wired."

Don't Look at Your Track Record Too Often (19:36)

Stig recommends not looking at your investment track record too frequently:

Looking quarterly can lead to short-term thinking
He only looked at his full track record after 10 years
Aim to look annually at most
Balance between knowing performance and avoiding irrational moves

He shares: "I certainly don't recommend that you only look at your track record once a decade, and I think I've taken it too far. But I want to tell you why. When I started studying Warren Buffett, it became very clear to me that I needed to think very long term and looking at my results every quarter would work against me."

Don't Only Have Public Equities in Your Portfolio (20:17)

Stig advises diversifying beyond just public stocks:

7 of 10 largest economies in 1900 had stock markets wiped out in 20th century
Stock markets can close for prolonged periods in crises
He has ~60% of liquid assets in public equities
Diversify across asset classes and geographies for protection

Run Your Track Record 1000 Times (31:23)

Stig recommends mentally running your investment strategy through 1000 scenarios:

Avoid resulting - judging decisions solely on outcomes
Consider how often your strategy would outperform across many scenarios
Think about mortality risk and family financial security
Focus on process over results

He reflects: "Whenever you think about running your portfolio 1000 times, you start to respect the process more than the results you have or have not achieved."

Position Sizing Framework (32:53)

Stig shares his framework for position sizing:

1% starter positions to avoid confirmation bias
1-10% for high conviction ideas at attractive valuations
10%+ for highest conviction ideas, let winners run
Cap initial positions at 10% to manage risk

He notes this approach works for him but may not be right for everyone based on risk tolerance and goals.

Understand Implicit Assumptions in Advice (35:59)

Stig emphasizes the importance of understanding the background and circumstances of those giving investing advice:

Consider their age, wealth, family situation, etc.
Advice that works for one person may not apply to you
Understand your own circumstances and goals
No one approach works for everyone

He reflects: "My point is that my circumstances are different not only from Guy, but from you and everyone else listening to this podcast. I have a bigger part of my net worth in private equity than most and I see the world through a different lens, not a better lens, but a different lens because I had different life experiences and I'm just wired differently and we all unique that way and have to lean into it the best possible way for ourselves."

Clay's Top Investing Lessons (45:43)

Clay Finck shares his top 3 investing lessons:

Find an approach that suits your style and temperament - Don't be afraid to index while learning
Be patient - Investing is a long journey, don't rush into positions
Be humble - The world is more uncertain than we think, be open to new ideas

On humility, Clay notes: "Remaining humble can really help you keep an open mind, take in new ideas, and be willing to admit when you're wrong. And if you aren't willing to consider these new ideas, then you won't evolve as an investor."

Conclusion

Stig concludes by emphasizing that investing is a lifelong journey of learning. He encourages listeners to read widely, study real businesses deeply, understand their own psychology, and develop a personalized approach aligned with their goals and circumstances. While there's no single right way to invest, focusing on process over outcomes and continuous improvement can lead to success over time.

The episode provides a thoughtful reflection on lessons learned over a decade of investing and podcasting about markets. Stig's insights on developing competence, managing biases, portfolio construction, and more offer valuable food for thought for investors at any stage of their journey. The overarching themes of humility, continuous learning, and personalization of approach stand out as key takeaways.