11 Practices for Lasting Investment Success - (3/3)
What really leads to lasting investment success? If you've read the first two parts, here's where it all pieces together. In part 1, we went through the practices that reflect the frame of mind needed for investing. In part 2, we covered what's required for practical decision-making in our investments. It's time to round up with this final part 3!
8. Focusing on Skill, not Timing
In a fable, there was once a determined woman named Eliza who lived in a village struggling with poverty. After reading about a man's forest providing abundant food, she started spending her little money on seeds instead of food, prompting her fellow villagers to question her. Her forest flourished, stunning the villagers who later decided to do the same. But storms shattered their efforts. They said they needed to find a better time with better weather for their seeds to grow.
Undeterred by the storms, Eliza persisted with her forest, eventually discovering a rapid-growing No-Fungi Tree (NFT). The villagers followed her, planting only NFT seeds. Yet a locust invasion destroyed their crops and they blamed their luck for it.
Eliza pressed on. Experimenting with diverse seeds, her forest thrived. She focused on her skill of growing crops, and eventually abundant harvests banished her family's hunger. The village's perception shifted, acknowledging Eliza for her efforts.
Eliza's tale comes from a book by Will Rainey and is a testament to what a determined focus on skill can bring. The story is remarkably similar to an investment journey. Many times, investors can discover really good ways to increase their wealth accumulation, similar to how Eliza and the villagers came across forest planting and NFTs. Yet we might also back away for reasons and distractions such as there possibly having a "better time" when the markets seem less wobbly.
Great investors understand that returns are ultimately derived from the consistent application of their strategies regardless of timing. "Let me enter at any time and I can still do just fine," says the skilled investor. He/she doesn't need a lucky time to perform.
So focus on the skill of how your portfolio is run, not the timing in which you make your micro-decisions. This makes the huge difference between an ultimately abundant harvest versus a never-ending bounce around for better timing.
9. Guarding Against Sensationalism
They say emotions are the bane of every investor. Well, some emotions can be helpful. It's just a pity that emotions regarding our investments tend to make us buy high and sell low.
Sensationalism is a big culprit. It doesn't help that the media today is driven by clicks and views. Imagine if you fed yourself heavily with the yearly news reporting on the US possibly not raising its debt ceiling. You read it every year, to the point where you start to think it’s only a matter of time before the US government defaults on its treasuries. This year, Fitch even lowered its grade on the US government's debt from AAA to AA+.
What thoughts might appear in your mind? You might start thinking that maybe you should exit all your US investments. Doesn’t matter if it’s your tech stocks, your own trading model, or AllQuant’s Multi-Strategy. You start to consider giving it all up, even if they are wonderful investments.
Sensationalism increases the intensity of emotions felt when receiving information. Eventually with enough intensity, action is triggered (usually by greed or fear).
The best investors practice discernment as much as they can to avoid letting their decisions be triggered by emotions. How do we do this? First, we humbly acknowledge that just like any other human being, we have emotions. Then we take responsibility for them by bearing in mind that some sources of investment information ought to be taken with a pinch of salt.
Pretty simple point for many, yet still a very important reminder for all.
10. Anchoring with a Financial Plan
"Nothing wrong with more money!" is a common thought for beginner investors. The consideration is simple, but is it truly helpful for long-lasting success?
Let's learn from two individuals. First, we have Alex, an enthusiastic investor eager to capitalize on market trends. Driven by the allure of profits, he dabbles in a trending cryptocurrency.
However, market volatility strikes. Alex's gains evaporate swiftly, leaving him vulnerable to the unpredictable nature of the investment world without any foundation of careful planning.
Alex is determined though. So he tries investing again, this time in just the S&P500. Yet when the 2022 inflationary season sent markets downwards, Alex started to fear he might lose money again. He sells a portion of his funds at a loss to alleviate his worry. Little does he know that in growing his experience and skill as an investor, he is back to square one again.
In contrast, we have Emily, a lady armed with well-defined goals, a keen understanding of her risk tolerance, and a thoughtfully crafted investment strategy. Like Alex, Emily's path comes with its challenges, with market fluctuations testing her resolve. However, her financial plan constantly reminds her of her purpose in investing, the time horizon she truly has, and her unique advantage over others who have already succeeded. Unlike her peers who may give in to fear and impatience, Emily remains disciplined in her own monthly budget for investing and is true to the conditions stated beforehand required for any investment switching to be made.
It goes without saying that compared to Alex, Emily has a much better chance of success years later. Over time, a financial plan acts as an important anchor in turbulent waters. We weather storms and yield growth aligned with clear purposes laid out for our investing. It shields us from reactionary decisions, allowing us to seize opportunities when others might falter.
Let's not underestimate a financial plan. Having clear goals and a strategic approach is vital to lasting success.
11. Loving the Practice... More than Anything Else
"Guys, I know Apple is a really good company and you think it'll be around for the next 10 years. But remember what we discussed about not falling in love with?" I was reminding my two friends.
The message that day was:
Don't fall in love with quick results;
Don't fall in love with your investment manager;
And don't fall in love with your stocks... or any other investment!
Results change, managers change and investments have to change over time. Don’t fall in love with your Apple or DBS stock… And AllQuant is good – we truly appreciate your support – but please don’t give us too much credit.
If there ever is something about investing that you love… I hope you love the practices more than anything else. For they are what lead you to long-lasting investment success. Not us, not your stocks and funds, but you. Your personal thoughts, habits, and practices.
So hold them close to heart.
It’s been great writing for you guys. More to come, and thank you for reading!
(This article has been edited for AllQuant’s audience. The original version is on my LinkedIn.)
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