5 Years of Reflection

Investment Process, Psychology, Reflection, Strategy, Time / Wednesday, October 25th, 2017

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These are a collection of my thoughts on investing over the past 5 years. Some from learning and observation, others through meditation on my own mistakes.


I have always enjoyed reading. Maybe that’s why I got into value investing. When I started, I would read anything I can get my hands on from blogs, investing books to Buffett’s shareholder letters and Howard Mark’s old memos. Most of the time, I have no idea what I read, but it was fun. And then I got interested in something else. I pick up psychology to learn how we think; study history to understand the past; meditate philosophy to find wisdom; read up biographies to discover life lessons; observe how ecology strategize and other disciplines. Robert Hagstrom was on point when he called investing ‘The last liberal art’ – it requires a good understanding of a wide range of fields if one is to succeed. The essence of investing comes down to this: Good decisions. All great investors are clear thinkers and good decision makers. To become one, you must have many mental models in your head to help you think and reason well. Philip Tetlock, who wrote Superforecasting, explain foxes – people who think in a multidisciplinary way, are better forecasters than hedgehogs – those who can only see things in a specialized, one dimensional way. But who is even better than the foxes are those that can think in many formal models. It is like instead of having a hammer for every problem, you have many tools to solve each unique situation.

Take a company that wants to automate their manufacturing process to reduce labor cost and we are interested to find out if the cost-saving has any impact on future profits and valuation. Well, complex adaptive system model in ecology explain how species interact with one another and adapts to their habitat to survive. Businesses, like species, adapt to their environment as well. Competitors will follow suit and automate their own operations if there’s nothing to stop them. Game theory also deduces that a competitor will choose to automate if that carry a better payoff than other options. These models do not provide the exact answer, they can even be wrong, but they make us a better thinker by looking at things from many different lenses. Learning finance is insufficient. One has to read and learn widely.

One thing I wish I had learned earlier is how to read well. Same as investing, reading is a complex skill that requires practice. Coming from a high school culture of rote learning, I wasn’t taught the right way to read. Before you learn, learn how to learn. Focus on the fundamentals and pick out the basic ideas. Connect what you learned with what you already know to aid memory. In addition, seek what nourishes the mind and discard the useless. Spend more time on books than articles. Whether you are trying to understand a company or learn a subject, you want factual information. So always go after the original sources. That means more books, annual reports and less news, analyst reports, or write-ups. Market news and analyst reports are nothing but opinions about opinions that distort facts and pollutes the mind.


Contrary to popular belief, what kills most investors isn’t market crisis but their own ego. I remember reading Howard Mark’s memo thinking “If this guy is always cautious and skeptical, I must be overestimating myself.” I was right yet learned it the hard way. My ego blindsided me from listening to opposing view despite being aware of the danger. It takes real work to cultivate open-mindedness. The kind of humility that says “I can be wrong so let’s find out the thought process behind the disagreement.” Taking in multiple viewpoints on how others reach conclusions reduce the probability of being wrong and increase the probability of being right. To have that beginner’s mindset and willingness to learn from others is difficult, but necessary. Think of it as a strength to see what everyone sees rather than a weakness for being unsure of yourself. Have a strong opinion, but loosely held. When facts change, change your mind.

Over the years, my perception towards the news has changed as I gained a better understanding of how they influence the way we think. The news is after the fact stories that turn the uncertain into certain; randomness into non-randomness; and probabilistic into deterministic. Just as hindsight bias makes the past looks predictable, this certainty illusion produce overconfidence in our ability to predict the future. This risk-taking behavior doesn’t always translate into immediate losses due to the role of luck. At times, it has the opposite effect – the combination of risky bets and good luck magnify the gains. This self-feeding confidence convinced one that these are true skill when in fact it is luck running on borrowed time. To put this in perspective, one can remain lucky for many years before a sudden blow up in one day. However, since we don’t know what we don’t know, most mistakenly attribute these gains to their hard work of following the market. This ‘more information is better’ fallacy increase the likelihood of information overload, which produces cognitive strain that promotes short-termism and herd mentality. As is often the case during a market crisis, our intuition will lead us to sell at the bottom.

You feed what you focus on. There is no right or wrong, only consequences. The more you follow the market, the more you become the crowd. I have been there done that. My biggest loss is the result of ego. Overconfidence, ego, ignorance, envy, and greed are the Achilles heels. Mistakes that can be traced back to market news and daily share prices. These are nothing but noises that hinder the real work. So instead of trying to be smart, I try not to fool myself and stopped following the market. The benefits are immense. Besides avoiding silly mistakes, I am more in control of my thoughts and emotions. My focus goes up and the ability to think clearly proves invaluable in an age of distraction.


We can’t win if we don’t measure. It is by improving decisions over time that one become a better investor. But this is easy said than done. Luck plays a huge role in determining the outcome; a stroke of good fortune can turn a bad decision into a winning hand just as easy as a bad luck can turn it the other way round. Therefore, measuring yourself against the daily share price movement will only lead to more bad decisions. The solution here is to focus on the process. An investment process examines the thinking and reasoning pathway behind a decision. If you bought a stock through a friend’s recommendation, that is a bad process regardless of the potential gains. In contrast, a decision that went through rigorous thinking yet result in losses should be applauded. While a good process doesn’t remove bad luck, it is an approach grounded on sound reasoning and yields incredible long-term results when practiced consistently. The two simple yet critical tools that I believe one should have are the decision journal and checklist. Although an investment process is not restricted to these two, I consider them indispensable.

Writing decision down is like cracking open the brain, inspect every decision and lay it bare so nothing can hide. By keeping a record of all buy and sell reasons, you can evaluate those decisions down the road on what went right, what went wrong, and how to improve them. It is best to take a multi-year approach to evaluate these decisions since businesses take time. The quarterly result has little meaning on the long-term trajectory of a business so it makes no sense to measure your decision every few weeks or months. This long feedback loop further means you are likely to forget or suffer from hindsight bias (looking into the past and tell yourselves you knew how things would unfold all along) unless you write it down. Instead of forecasting share price, focus on key operational metrics such as return on capital, cash flows etc. Ask “How these key metrics will change in 5, 10 years time?”, create a hypothesis, test all assumptions and make a rational decision.

The act of writing prevent us from jumping to conclusion and commit stupid mistakes that stem from lazy thinking. More often than not, it is our quick thinking that fails us as opposed to the slow reaction in the market. Common sense is unconventional. There are many times when I would buy stock under the state of euphoria and later question the rationale behind owning it. These are unforced errors in tennis terms. Stupid errors that are easy to fix and save me a fortune if I write them the reasons down.

On the other hand, the checklist is a list of things that you go through before a buy or sell decision. Think of it as a filter that stops bad decisions from flowing through. The difference between the journal and the checklist is that any mistakes discovered through the former will go into refining the latter so the filter quality improves over time. Another way to shorten the feedback loop is to learn from someone else’s mistakes. Good decisions compounded over the long-term will produce profound returns.


Before the arrival of the smartphone, Monopoly is considered one of the most popular family pass time game. As most would know, to win the game, all other players have to go bankrupt. So to increase the chances of winning, you’ll need to come out with a plan such as which properties to buy, whether to concentrate or diversified bets and if you end up in jail, should you finish the jail term or pay the fine to get out etc. In other words, you are strategizing by making explicit decisions on what to do and what not to do in the game.

The same applies to investing. Our time, energy and capital are limited. There is an opportunity cost in every decision that we make so having a well-defined investment strategy allows you to focus on a few things while ignoring the rest. It is through this rigorous process that you develop your edge and become the best in what you do. As with any strategy, the hardest part lies in sticking with it. You have to have the mental fortitude to let opportunity passes by and watch others make a fortune if it doesn’t align with your strategy. It is also an acknowledgment that we are not smart enough to know everything in the market so it is critical to pick our battles. Engage only when your edge provides overwhelming odds of success. Giving in to temptation and trying to be opportunistic is the surest way to mediocrity.

Finding the right strategy is a trial and error process on what works and what doesn’t rather than something that we can figure out in advance. I was attracted to low-quality stocks that are quantitatively cheap in the early years. The idea of owning ugly stocks that nobody wants sounds appealing and contrarian by nature. This strategy calls for a mix of 30-40 stocks. While most of them are likely to suffer losses, a few that turns out to be big winners will deliver an overall satisfactory return. It has proven to work but it wasn’t for me. I find myself having a poor conviction on holding these stocks and their high turnover characteristic demands more energy and less time for me to pursue other interests. It is through these missteps and introspection that I gradually turn my attention towards high-quality stocks.

This personal experience underlay an important suggestion – The best investment strategy is likely to be one that aligns with your lifestyle. What you do in investing is interconnected with other things in life since your resources are finite. The role of an investor is to allocate capital in a way that generates the highest long-term compounded return. In life, your role is to allocate your time and energy in a way that generates the highest long-term compounded happiness. If both fail to fit together, it will create frictions that drain you financially, mentally and physically. These frictions can take many forms such as a busy surgeon who tries his hand on turnaround stocks; a long-term investor who checks his shares every day; or someone spending a disproportionate time obsessing over trivial matters. You want to identify and remove them as much as possible.


In the Karate Kid movie, Daniel Larusso always feels frustrated whenever Mr. Miyagi ask him to do things that look unrelated to learning Karate such as painting the fence, sanding the floor, or waxing the car, but they turn out to be the building blocks of mastering the art. The investing fundamentals are similar to these groundworks.

They build the foundation for all branches of knowledge to hang on to. Just as the strength of a tree trunk decides how far the branches can grow, your ability to grasp the complex rely upon your understanding of the basics. None of the investment opportunities are identical but they’re all governed by the same basic fundamental law. Without a good foundation is like chopping a tree with a blunt ax, it is at best, inefficient, at worst, fatal. You can analyze hundreds of stocks a year but if you don’t understand how business creates value; how to value them; how to think about price; or how the market works, all these efforts will come to naught. I’ve seen investors who have remarkable analytical skills yet make an erroneous fundamental assumption. It doesn’t matter how fast you are going if you are in the wrong direction. So master the fundamentals first. If you are going to chop down the tree in 6 hours, spend 4 hours sharpening the ax.

It didn’t take long for an amateur like me to pick up the quantifiable basics like Return on Capital and Free Cash Flow before moving on to something else. As my rationale goes “What more is there to learn about simple formulas?” But then I observed something peculiar. Professional coaches in their respective field, whether that’s gymnastics, piano, or chess, spend an inordinate amount of time drilling the basics to their students. Rudimentary education that one would receive as if it is their first day. At the same time, I began to experience difficulties when solving complex investment that has many moving parts. My inability to strip down the problem to its essence stems from my poor understanding of the fundamentals.

Just as my early experience would indicate, anyone with a high school arithmetic can compute a ratio or formula with ease. But what separates the expert from the amateur is the ability to see beyond the obvious. Just as an amateur chess player can anticipate his opponent’s next move with ease, trying to conjure up all possible scenarios in the subsequent 10 turns will overwhelm his cognitive abilities. In contrast, it is a walk in the park for a grandmaster thanks to his pattern recognition ability that draws from an endless repertoire of experience. The difference here is between knowing and understanding; knowing a subject is easy whereas understanding it requires a solid foundation to hold various parts together. I thought I have learned it all when in fact I was scratching the tip of the iceberg.


Since the beginning of this year, I have been thinking a lot about what are the things that will matter 20 years from now. Many things are screaming for our attention every day that it has become impossible to differentiate between the important and the trivial. To bring clarity to the thoughts, one must examine his choices from a long-term perspective. Thinking in long-term filters out all the irrelevant like a hot knife through butter. You will be surprised how many things that look important today don’t really matter in the long run. You can look busy every day as if you’ve accomplished a lot but don’t confuse movement with progress. Progress comes from doing what’s relevant, which is synonymous with boring. Many would rather avoid it. It is far exciting to predict what’s going to go up tomorrow than spending hours practicing the fundamentals. In addition, progress is not always obvious right from the start. It can crawl as if all the efforts are destined to go to waste before it compounds. But if you can lengthen your time frame, you’ll be more patient with your progress and focus on what is true in the long run; things that won’t change so you can invest your energy into them instead of fixated on the scoreboard.

There is no shortcut in investing. The same applies to everything in life. Don’t trust anyone that sell secrets either. Most of the things that can be bought have little long-term value. There’s no surprise that those that can’t be bought are the ones that move the needle. Independent thinking, cultivate the right temperament, practice good decisions, exercise self-control, and having a focused mind are things that will stand the test of time which you should spend most of your time on. A question that you have to constantly ask yourself is “Will this matter in the end?”

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4 Replies to “5 Years of Reflection”

  1. Mr Yeo,

    I have not read your blog for a while. This one is a good reflection and I have the same reflection too.

    Thank you.

  2. Great summary here, lots of wisdom and memorable quotes.

    I’ve heard about the checklist, but to write down your decision-rationale was a new tip which makes a lot of sense. Plenty of useful material here for a soon-to-be investor, thank you!

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