After the “You CAN Beat The Market w/ Brian Feroldi” podcast episode went live, I got this question on Twitter, “How much time do you think is minimum to study a company that you want to invest/had invested in?”
This was just the most recent time I’ve been asked this, but it’s actually a very common question I get, so I wanted to provide a little insight.
As I wrote in the tweet above — it depends.
There’s no set time limit that says you HAVE to analyze a company for a certain period of time before you’re “allowed” to invest (or “should” invest).
Rather, you should look at it in terms of your level of understanding and conviction, not time.
One of my favorite quotes from Warren Buffett is along the lines of, “you should only invest in companies within your circle of competence.”
(Image Source: fs)
I live by this quote, but, it’s also a spectrum.
There are companies on the easier side of the spectrum, while there are companies on the harder end of the spectrum, but still within your circle of competence.
The latter would take longer to analyze than the former, but it can still satisfy Buffett’s rule.
If you analyze a company you are able to understand and have a high conviction in quickly, then maybe 8-10 hours is all you need. If it’s a bit more of a complex company, stretching your circle of competency spectrum, and isn’t widely covered by analysts and financial news, it may take upwards of 20-40+ hours.
The danger to this is the sunk cost fallacy. Too often I see investors spend significant time analyzing a company, then feel they have to invest in it just because they’ve put in so much time learning about it. Or, because they’ve put so much time into learning about it, they have a bias when creating their investment thesis, causing them to be overly optimistic about certain things they otherwise wouldn’t be if they were able to think clearly without bias.
How do I know this happens? I hear about it all the time from listeners of the podcast, and, I did this myself for a while.
This is one of the reasons why investing is so hard. Emotions. Behavioral finance. Psychology. It’s working against you.
You also have the sunk cost fallacy at work.
Realize that the time spent analyzing the company is a sunk cost. Whether you invest money in the company or not, you’ve already spent/lost that time — there’s no getting it back. Does it make the situation any better if you invest in the company, even though you don’t fully believe in it, just because you spent time analyzing it? Does that give you back your time?
No.
It just causes you to lose time AND MONEY.
There are two ways I’ve learned to combat this.
The first is that I invest a few hours (1-3) in learning about a company, then I decide if there is potential. If there is, I will keep researching further. If I’m not sure or I don’t think there is, I stop there and don’t spend any more time on it. If I’m not sure and think there might be an opportunity, I might research slightly more, but most likely, I add it to a “research more later” list.
The second is that I’ll open an insignificant, immaterial starter position, maybe a few shares (0.1-5, depending on price), just to get some “skin in the game”. It’s amazing how having even just a little skin in the game can impact your willingness to research.
I don’t buy so many shares that it causes me to have a bias to only look into positive things about the company because I own a position, rather I buy just a few shares to get skin in the game, which motivates me to research more.
I do a bit of research, then either sell the 1-5 shares I bought if I don’t like what I found, or I buy more if I do like what I found and start building up my position.
If you can do the first strategy I mentioned, that’s usually my preferred method. However, if you need a bit more motivation to do the research, I’ve been successful with the second strategy as well.
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Thank you to everyone who made the transition over to this newsletter with me from Instagram and other social media platforms. I will still be active there from time-to-time, but my focus is here, on The Leonard Letter. I will still be posting on my IG stories frequently, Reels as well, but native content posts will be far less frequent, and this newsletter will be more frequent.
I have a lot of cool, exciting things planned for this newsletter, so stay tuned!
All the best,
Hey Robert - what about ETFs and index funds, how long do you analyze those and what do you look for in them (other than expense) before investing in one?