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How to Invest in Stocks Like a Scientist

Andrew is a self-educated business owner and entrepreneur with plenty of free advice (which is worth exactly what you pay for it!).

Make the most of your investing journey by treating the process as a series of experiments.

Make the most of your investing journey by treating the process as a series of experiments.

If you enter into investing with the number one goal of making money right away, you might be sorely disappointed. My own journey into stock investing began only after a great deal of education. I had been a huge fan (and practitioner) of dollar-cost averaging—investing the same amount of money every week into a small portfolio of index funds. This is an approach that many investors have come to understand as a way to reliably grow alongside the market over time without worrying about underperformance.

My Investing Story

While I was steadily using this autopilot investing ("set it and forget it") strategy, I spent about five years learning about investing in individual stocks before I felt confident enough to start picking my own. While this may have been overkill, I didn't mind learning so much before I leaped in, since I regarded investing as an extension of business ownership, and I was already obsessed with businesses.

While I learned about individual companies I might buy one day, I also focused on learning principles that would apply no matter what. This led me to read the words of wisdom the Oracle of Omaha freely shared, listen to dozens of very good audiobooks on investing, and slowly grow my own set of resources for value investing that I had come to trust over time.

All of this research led me to have just enough arrogance to believe I might be able to do what more than 90% of people can't do—beat the results of the market over time while retaining enough skepticism and humility to believe I might be wrong every time I make a decision.

Education is rarely free, but it doesn't have to be particularly expensive either.

Education is rarely free, but it doesn't have to be particularly expensive either.

Investment Education and the Cost of "Tuition"

Learning in advance of your investing (and doing plenty of ongoing learning while you're actively managing your portfolio) is crucial to your success, but there's something else that might be even more important: viewing your portfolio as a lab and constantly running experiments with your money. You want to test out every assumption about investing that you possibly can, and you want to start doing it with relatively small sums of money.

Keeping your tuition cost as low as possible is a very good thing, but ignoring that there is a price of tuition for every investor is something you do at your financial peril. Start viewing your growing capital as not only the objective itself but also as a means to another end: learning how to invest better.

Testing Your Investment Assumptions Like a Scientist

You need to run little experiments in order to test your assumptions, and this is a great thing to do with individual stocks. Just like a good scientist does in their lab, you need to write down why it is that you're buying a stock or at least understand (and remember) this. You tend to develop an investment hypothesis, and the next thing to do is to see if the guess holds any water.

Do you think a stock's value might double over the next three years? What if you're wrong? Is it still something you want to own? What if you're buying a stock because it has a steady, growing dividend? You'll want to make sure the dividend is still growing after some time.

Perhaps an even better way to manage larger-scale assumption testing is to have multiple brokerage accounts. You can think of each brokerage account as a separate portfolio if you'd like, and you follow a unique certain set of rules with each separate portfolio. It's up to you to determine which assumptions you want to test out, but some useful variables to try out might include the following.

Investment Variables to Isolate and Test

  • Holding period: You can try selling individual stocks whenever they jump in one portfolio but insist on holding on for a longer duration in another.
  • Percent gain: Similarly, you can wait for one portfolio's stocks to be up by, say, 20% before selling them in one portfolio and up by 50% in another.
  • Diversification: Charlie Munger famously calls too much of this "di-worstification," but how much is right for you? Experiment with a concentrated portfolio of 5 or 10 stocks in one portfolio and a much wider array in another.
  • Timing: While market timing is a silly thing to try to do as a primary means of investing, everyone likes to buy more when stocks are cheap. Try buying a lot of stocks when they're cheap in one portfolio and buying with more of a dollar-cost method in another.

Tuition-Free Learning

While it's important that you continue to learn with your own money (and there really is no substitute), you should also spend some quiet time doing thought experiments. Think about what will happen with some of the variables you want to try out, and you might be able to conclude a probability of outcome without risking any cash.

Even better, do as Munger suggests: learn from the mistakes of others. There have been tons and tons of investing blunders over the years, and people have even written books about them and told stories that have been made into movies. Take the time to understand the errors of the past, and you'll be less likely to repeat them on your own.

Even still, there's something about having skin in the game that makes the lessons you learn on your own stick. Use both approaches, and never stop viewing your investing journey as that of a student. You'll keep getting better over time, and that's the name of the game.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Andrew Smith

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