It’s important to know your limitations in the market. I’ve noticed that I’ve focused too much on what I know, and what I don’t understand has received less attention. The worst investment mistakes are easily made when one doesn’t realize they are stepping outside their area of expertise. Below, I’ve listed a few essential things I don’t understand.
Valuation: I have a very shaky understanding of valuation, and even slightly more complex models are far too difficult for me. I look at value at a very rough level and don’t make precise estimates at all; instead, I think more about the general ballpark.
Financial statement analysis: I understand the basics but ultimately very little in depth. I generally look at the income statement, balance sheet, and a few key ratios.
Technical analysis: I haven’t delved into this at all.
Fixed-income investments: I’ve studied very little; I know the very simple basics, and that’s enough since my only fixed-income investments are in a short-term bond fund (a parking spot for cash).
Currencies: many things affect exchange rates, but the laws of the entire currency market are unfamiliar to me.
Derivatives: I’ve even invested in these sometimes without any understanding. This market is a complete mystery to me, and nowadays I stay far away.
Cryptos, gold, and commodities: too difficult, I don’t understand their value development.
As you can see, even many basic concepts are on shaky ground. My area of expertise is therefore quite narrow, and I need to remind myself not to stray too far outside it. I have been developing and continue to slowly develop my skills, so progress is being made in some areas.
How about the rest of you, what are some things you don’t understand/master in investing?
I’ve been firing off a ton of questions to AI models for a couple of years now, and I decided to ask one of them, “Based on my questions, what is the most difficult thing for me to understand about investing?”
Answer:
In investing, the most difficult area for you to grasp seems to be this:
“Why doesn’t the market rise even when facts, news, and logic would suggest it should?”
In other words:
Why doesn’t good news immediately raise the stock price?
Why doesn’t bad news always lower the stock price?
Why does the market often behave contrary to what it should?
How to overcome this problem?
Short and practical answer:
By understanding that being right is not enough – you need to get the market on board.
1. The market prices the future, not the present
You have often looked at:
results
cash flow
short statistics
pipelines
But the biggest brutal truth about the markets is:
“The right information at the wrong time does not benefit the investor.”
2. Good news doesn’t move the stock price if there are no buyers
It’s ridiculously simple:
if institutions don’t buy
if fear is stronger than greed
the stock price won’t rise, even if the company is a gold mine
3. The market can be wrong for much longer than an individual investor can bear to believe
Yes, the main things from this year would be why Fortum is an AI company if it sells electricity to a data center, and how I managed to start selling Citycon just before the tender offer.
Using financial leverage in practice. I understand that if the return is higher than the cost of money, leveraging yields better returns, but I don’t think I’ve ever used leverage in actual investments, so I have no practical experience. Perhaps I should learn it sometime, although on the other hand, being debt-free reduces stress.
The idea behind this is that if data centers significantly increase electricity consumption, the price of electricity rises, meaning Fortum gets a better price for the electricity it produces, especially since it has abundant base load and regulating power that produce even during times of expensive electricity when renewable production is low. On the other hand, data centers are built in Finland primarily because of affordable electricity, so not so many will be built that electricity becomes uncompetitively expensive.
Fortum is also a district heating producer, so it can benefit from the waste heat produced by data centers; first, you sell electricity to the data center, and then you get cheap waste heat back from the data center, which you can sell to district heating customers.
There’s a lot I don’t understand about investing, but that has by no means been an obstacle or hindrance to starting investing. If I wanted to, I could develop a lot as an investor by gathering a lot of information, but I’m content with making a steady return instead of diving into the deep end, meaning I’m just a boring amateur investor.
Me as an investor is a bit like reading the plot summary on the back cover of a book without reading the book itself, or watching a movie trailer without watching the movie itself, meaning I grasp the subject and understand what needs to be done and how, but I don’t delve deeper into crunching numbers or exceeding my risk limits in the hope of greater returns, because that could even make me a worse investor than I am now, as can happen.
Even as a boring activity, investing is already so interesting that I really like it as a hobby at my current level of knowledge and skill. Knowledge might even increase sorrow, so this is also one reason why I am always a cheerfully optimistic investor type, unconcerned by market fluctuations, who just keeps going like the Energizer Bunny.
Yes, the most difficult thing to understand is what things are already priced in and what are not. Especially having spent my entire career in the AI sector, I already felt late to AI stocks by the end of 2022, when GPT-3 came out. After all, previous GPT models had been out for ages.
Why wouldn’t the things I know and see coming already be priced in, if the market is efficient? The need for shovels, i.e., NVDA, SMCI, etc., must have been priced in by the end of 2022. Why would I be early and others late? The same applies to the European defense industry.
It feels like instead of a rational thought process and calculations, one should rather try to predict how other traders will think in the future, and play accordingly?
Pretty much the same. I’m somewhat interested, but I’d almost need someone who uses leverage to explain step-by-step how to proceed with it. I guess my biggest question mark is regarding the repayment of different credit lines and other loans, how that side works and should be managed.
I don’t understand why selling at a loss is so difficult for me, even though I know it would be advisable to do so. So I guess it’s my own behavior and difficulty in developing myself.
One thing I don’t understand is the behavior of the markets. Actually, related to the second post in the thread. When I have made investment decisions based on the information I’ve received, in order to act the same way as the markets (apparently correctly), I would always have to do the opposite of my conclusion. And I also don’t understand the mass hysteria of investors in that context; probably we small people trying to save retirement money are the biggest culprits.
I don’t understand cryptocurrencies and the trust investors place in them. For instance, we had the OneCoin scam. What then makes current cryptocurrencies more reliable? Perhaps I don’t understand blockchain technology enough. Similarly, when people are defrauded in bank scams, the money is usually quickly converted into cryptocurrency. The same applies, for example, to drug markets; payments are often preferred in cryptocurrencies. In my opinion, the most important characteristic of money is trust, and I can’t really consider them “trustworthy entities.”
There are likely many opinions on this, but I personally see a partial investment in BTC as a currency/inflation hedge and independent of FIAT currencies. Different countries’ currencies are tied to politics and, for example, debt, for which BTC serves as a safety valve, free from any country’s economic policy.
I don’t know how to invest in fixed income at all. I don’t understand the factors that affect the performance of interest rate products. I don’t know when to buy short-term or long-term rates. I wouldn’t even recognize a money market fund if I were offered one. I have solved this problem by having my share of my workplace personnel fund be fixed-income-weighted. At least you can choose that way with Mandatum.
I don’t “understand” investing in US stocks in this day and age. Running wild as the leader of the world’s most powerful nation is a maniacal egoist, who has
A) threatened to leave Ukraine at the mercy of Russia
B) threatens to blow up the whole of NATO by taking over Greenland and thereby also causing immense security risks for all of us
C) Shakes the global markets with Tweets in which he unilaterally announces he’s raising tariffs through the roof
D) is bringing a lawsuit against the Chair of the independent FED
E) is withdrawing from all environmental agreements just because a V8 makes a nice sound
And the list could go on forever. In the US, the primary factor in voting decisions is the economy, and if I can somehow contribute to the cause by driving the US economy down, I will do so.
Then again, I don’t understand the cause-and-effect relationships of the investment world well enough to say whether boycotting the US market has any impact on that market. I don’t mean that Retail Investor Pirkko’s pennies don’t matter, but rather, does it hurt the US market even by a billionth of a fraction if investors don’t participate in it? If Pirkko sells her US stocks, someone still owns them. Does it make any difference whether they are owned by Pirkko or Michael Maga?
Is the impact of the boycott real or symbolic?
But be that as it may, I tip my hat to you! That is principled stuff.
DT is, however, a different matter than the USA and individual companies. I’m personally reflecting on this angle: they say you shouldn’t fall in love with stocks, but what about a hate relationship?
I fully understand the risk assessments, and I have previously completely withdrawn from Chinese holdings as the value base was entirely unacceptable to me, but regarding the USA, it is difficult to draw a single conclusion across the entire corporate landscape.
I have also reduced and sold US funds, but I haven’t abandoned individual stock holdings based solely on a market block.
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The market is efficient enough that 15% dividend yields are practically always unsustainable, meaning companies that temporarily pay such dividends will at least significantly cut their dividends. The danger zone actually begins long before 15%.
1. The market prices the future, not the present
