A 5 Step Process to Improve Your Investment Acumen With Zero Risk

Level 2 - Value Investor

Welcome Avatar!

In 2022, many people who made gains in 2021 learned that investing/trading isn’t so easy. Short-termism in your investment approach is a fast track to poverty. Investing is a marathon not a sprint.

How you learn and who you learn from will dictate the quality of your skills over a long time horizon (the only time horizon that truly matters).

The problem is you don’t know what you don’t know.

When we started out in the investment industry, we had people with decades of experience navigating market cycles to mentor us. While we can’t pass along all our learnings to you in a single article, what we can do is give you a step by step process you can use to develop your own investment acumen. Best of all, it’s completely free and doesn’t require you to put any of your own capital at risk unless you want to!

Getting Better

What is the most important thing to improve your skills in anything, not just investing?

There are many terms for it.

“Shots on goal”

“At bats”

"Iterations”

“Repetitions”

It doesn’t matter if you want to lift heavier weights, learn to cook or make money investing. It comes down to repetition and exposure to different scenarios.

That means if you want to get better at investing, you need to invest more (duh!).

The problem is, investing, unlike doing pushups, can be very costly. Bad investments can take the wind out of your sails and set you back for months or even years.

You need a systematic approach to improving your skills without lighting your portfolio on fire.

We’ve laid out a five step process you can use to improve your investment acumen without losing all your money.

Step 1: Data Gathering

At DeFi Education, we believe in a data driven approach to investing. That’s why we suggest starting with the data.

First you want to identify the various sources of data you have access to when looking at an investment. Data availability will vary significantly based on whether you’re looking at stocks or crypto, public or private investments, and mass market vs niche industries.

Here are some common sources for high quality data:

• Public filings (10-K, 10-Q, investor presentations, etc.)

• Financial reports (Aave, Yearn, etc. are examples of protocols that provide these)

• On-chain data (Etherscan, Nansen, Parsec, Dexscreener, etc.)

• Research reports (DeFi Education substack, equity research, industry coverage)

• Protocol documentation

As you absorb and study the data you should begin to form a more holistic view of an investment, an industry and its participants.

Step 2: Synthesis

Data is only a starting point - you need to understand what the data means. This is our bread and butter over here at DeFi Education. We spend hours pouring over the data and putting together a complete picture of a protocol or industry event.

It’s not enough to know that a business’s userbase has grown, you need to know how and why it has grown and whether or not it can sustain growth. Then, you want to know ways that growth can be converted to value in the future. You want to understand:

• How a business works

• What are the key levers that create value for that business

• What are the most important metrics for this specific business that would be indicative of its performance

• How the data is perceived by prospective buyers of a related asset (stocks, bonds, crypto, OTC buyers, etc.)

By synthesizing the data and information you’ve gathered, you should have a detailed view of a business and its prospects. Once you’ve done that, you can move on to the next important step.

Step 3: Investment Thesis

Buy. Hold. Sell. Short. Farm.

Once you know how a business works, the key drivers, and the important metrics, you have to decide your plan of action. What decision will you make based on your analysis. The investment thesis requires you to take a view on not just the performance of the underlying business or protocol, but also how a related asset will move in relation to that performance.

If you look at the structure of any hedge fund, you’ll notice that there are only a handful of “portfolio managers” but there are many analysts. Being able to act and pull the trigger on an opportunity is a more valuable skillset than being an analyst alone. While many portfolio managers were once analysts, they graduated to being the person that puts risk on the books. They own the downside risk of the investment decision, and get most of the reward as a result.

Steps 1 - 3 will make you a better analyst, but steps 4 and 5 are what will make the difference in your returns. Most people can be taught how to gather and synthesize data and formulate an investment thesis. Fewer can use that to generate positive returns and mitigate risk over a long period of time.

Step 3.5: Capital at Risk (Optional)

Put capital behind your thesis. This is an optional step as this post is for beginners and we don’t want anyone ape-ing their whole portfolio on their first investment thesis. However, you will probably take the exercise more seriously if you stand to lose money by being wrong. If you have the appetite for it, feel free to put capital behind one of your ideas.

Step 4: Tracking

We expect to lose over 50% of people here as we are entering the more “boring” aspect of investing. It’s extremely important that you track your investment against your thesis and build upon it depending on new information. If you’re just starting out you should limit investments tracked to one or two ideas so that you can really dig in. Aim for depth not breadth early on.

As part of your investment thesis, you should have outlined all the reasons on why to buy something. These can include:

1. Best in-class dev team with proven track record of shipping product

2. Tokenomics are superior to competitors and have real value capture

3. Project is still relatively unknown

4. User growth is accelerating (have a thesis on why)

5. Upcoming “event” where tokens are being removed from the supply and market does not fully understand

6. Project provides a unique service the market does not realize it needs yet

There can be one key reason or many reasons combined that make something a good buy (or short). The point is you need to have your own thesis on why. Then, you track your thesis against what actually happens and see how price reacts. This is important to do in real time otherwise you will not learn as much. Have one investment you track religiously on a daily basis until your thesis either comes true or is proven incorrect.

Step 5: Lessons Learned

We will probably lose 90% of people here (paid subscribers will make it since they’re all turbos).

The final step is writing down what went right, what went wrong, and how much money you would have made or lost following your own thesis.

If you were right, consider whether or not you were right for the wrong reasons. If so, note down what your blindspots were that caused you to miss something that was bullish. Also record what you got right - over time you might find that you are good at spotting certain types of investments or situations and that can be developed into an “edge”.

If you were wrong, no problem. Again write down what you were wrong about and why. Did you miss a key piece of information? Misinterpret some data? Were you wrong about the team? Did you expect the market to react one way but it reacted another?

Bonus: Study History

If you really want to get ahead, make a list of tokens that have been successful in the past and back into the investment thesis. Why was it successful? What indicators can you uncover that can be applied to future investments?

Concluding Thoughts

Crypto tokens tend to have short lives. Often times the most important thing you can do is be early. However, you also need to be able to ride the winners (max pain is selling a potential 100x for a 2x). Knowing if, when and how to take profit is an art, as is knowing when and what to buy.

You might be thinking “well this project’s roadmap is at least 6 months, how do I know if I’m right?” Then you’ll just have to wait it out. You will not become a master investor or trader overnight - anyone who says otherwise is lying. If you have the time you can conduct this process for more investments. “Shots on goal” is the best way to cut your learning curve short.

We’ve laid out a repeatable process that anyone can use to develop their investment acumen even if you have no money. Everyone has time to track at least one investment if they are serious about crypto.

This is a completely free post that requires zero capital and is really all you need if you want to make progress over time. If you want to accelerate your progress and learn directly from us, subscribe to DeFi Education where we have 100+ articles you can read including deep dives of protocols, trade ideas and general industry and market commentary. We put out a new post every few days.

Until next time, anon.

Disclaimer: None of this is to be deemed legal or financial advice of any kind. These are opinions from an anonymous group of cartoon animals with Wall Street and Software backgrounds.