Don't Underestimate the Challenges of Investing

It rewards hard work but punishes half-assed efforts

As I continue to expand my Medium presence, I've been hearing from an increasing number of people who are interested in investing.

Now, I began investing seriously in 2003 and have spent the better part of 15 years evaluating investments and researching investment strategies. But I've since scaled back my involvement in the field after deciding to devote my time to writing instead.

The issue I see with a lot of the new investors I'm meeting is that they're trying way too many different things. As a consequence, they end up complicating things even more than they ought to be.

Avoid making errors of commission

The majority of the errors we consider these days are errors of commission or mistakes we commit by failing to do anything. This is related to FOMO (fear of missing out), such as the feeling of missing out on buying Bitcoin for $5,000 in March 2020.

The beginning investors I'm meeting, on the other hand, are eager to buy into something different. These investors run the risk of making errors of commission, which are mistakes made by doing something we shouldn't.

And investing is rife with the possibility of errors of commission. In November 2020, I published an article entitled "7 Toxic Investments to Avoid to Preserve Your Wealth" that discussed some of the risky terrain that beginning investors might find themselves in.

At the time of writing, I was concerned about the growing tendency to speculate in complex financial instruments such as derivatives, forex, high-yield bonds, and commodities, among others.

Back then, I also listed cryptocurrencies as a potentially risky asset class, primarily because I thought the space was too difficult for a novice investor to understand. Although I believe the technology as a whole has value, the unregulated nature of the market also means that there are plenty of possible scams and traps for the unwary investor.

With the benefit of hindsight, I'd have to add SPACs and NFTs to that list for the same purpose. There's nothing particularly wrong with SPACs or NFTs as a class. The problem is that distinguishing between the great opportunities and the duds is incredibly difficult.

Similarly, I demonstrated how easy it is to make mistakes when investing in individual stocks in another article I wrote way back in October 2020, "Stock Picking is a Terrible Way to Make Money".

It's not difficult to buy and sell stocks. Making good stock selection decisions, on the other hand, is extremely difficult, particularly when you're just starting out.

Part of the issue stems from the fact that stock returns are heavily reliant on chance. It's trivial to come up with a half-baked investment thesis and then see the stock grow exactly as you expected, but for completely different reasons. You might think you are right, but you just got lucky. As a consequence, you might become overconfident in your abilities in the future.

So, what should a beginner do?

My most recent article suggests that considering investing as a side hustle is delusional. For all of the reasons I've just mentioned, being a successful investor is incredibly difficult, which means it is realistically a full-time job.

Furthermore, developing the skills necessary to become a great active investor is a waste of time unless you have plenty of capital available to you. In my article, I showed that even if one can achieve annual returns comparable to George Soros or Warren Buffett's track record, with $50,000 start-up capital, the approximately 30,000 hours of work it takes to grow that capital consistently at 20%-30% annual rates of return simply cannot be justified.

You tell me how difficult it is to build a net worth large enough that you can invest $50,000 in the stock market.

The effort only becomes worthwhile if you're beginning with a greater sum of seed capital, or if you're paid to invest other people's money for them. The latter case has a name: hedge fund manager which, as we all know, isn't exactly the sort of work that lends itself to being a "side hustle."

As a result, beginning investors would be wise to invest their money in a passively-managed fund. It's not thrilling, but it gets the job done.

Meanwhile, beginning investors are better off concentrating on growing their business or managing their expenses to increase their monthly savings. It would only make more sense to spend more time focusing on investments once that seed capital has grown sufficiently.

But, thinking of investing as a "side hustle", or looking for increasingly exotic investments in the hope of achieving exceptional returns is more likely to keep people from reaching their financial freedom goals than getting them there.