“Investing is nothing but a journey of learning from mistakes and getting better at it. If you’re not willing or able to do that – however you define yourself as an investor – you won’t survive over the long term." - Rajiv Jain, Chairman and Chief Investment Officer of GQG Partners
While Warren Buffett resides over a personal net worth of $105 billion (as of 2021), it didn’t happen overnight. It took Warren until age 32 to become a millionaire, and then another 28 years to become a billionaire at age 60. What took you so long Mr. Buffett? No doubt an extreme example but my point is that building wealth is a journey. It takes time for the full power of compounding to take effect and it takes time for your investing expertise to improve.
My own journey, while it sadly hasn’t followed that of the Oracle of Omaha’s, is common amongst self directed investors. Enter the workforce with dreams of getting rich quick. Learn about some “can’t miss” stocks by eavesdropping on a gym change room conversation. Buy said “can’t miss” stocks without any research. Lose money. Rinse and repeat. Realize investing is hard. Dive in headfirst and consume everything I can about investing. Get better at investing over the years by making mistakes and learning. Hopefully remember mistakes and avoid repeating them. Have some fun along the way.
My story has more nuance. It’s worth telling as a cautionary tale.
My first foray into the world of investing started when I was 22 years old, during the dot-com bubble of the late 90s. These were the days of “growth over profits”, pets.com, and “prefix investing” where companies looking to boost their stock prices added “.com” to the end of their name, a practice even my local dry cleaner followed to boost its brand appeal with trendy consumers. Investors jumped into the Internet gold rush with both feet, hoping to make a quick buck. I can remember the day I became addicted to fast money – sitting in a boardroom listening to the Chairman of an Internet start-up I was working for at the time tell us the company’s stock was poised to double from $30 to $60, this was after a spectacular 24 month run in which the stock rose from $2 per share to $30. Plain and simple it was inexperience and youthful bravado that caused me to buy into what this charismatic chairman was selling and hold on to the stock rather than cashing out and walking away with a cool $84,000 capital gain at 22, made in under two years. If I could only go back in time and give this younger version of myself some sage advice. I would tell my younger self:
“This is a BUBBLE, pure and simple, SELL AND BE HAPPY for this once in a lifetime economic opportunity”
Sadly, rather than taking my unbelievable gains for any 22-year-old and investing in more stable investment options, I watched the stock go lower and lower, holding steadfast to the now seemingly hollow words of that Chairman, and to be fair the overall sentiment of the times, that Internet stocks are poised for a rebound. There was no sound economic basis for the out of this solar system valuation attached to the company I was working for.
I did eventually sell most of my holdings at $12, but I was living in a distorted reality that suggested traditional valuation methods no longer applied in “Business 2.0”. I continued my risky investing approach, with no process or discipline. I took the proceeds from my sell order and started investing in some suspect companies – one company “Visual Bible” is THE example of my haphazard investment style at that time. This company’s mission was to create the first ever word-for-word dramatized DVD Bible for children and adults. A seemingly noble mission, but not one that was going to turn me into a born-again investor. It got worse. As a member of a stock discussion board with some of my colleagues at work, I reached my personal investing low point by investing in a company based simply on a tip and three letters making up the unknown companies’ stock symbol.
The good news is that I’m a recovering uninformed investor and I’ve tried to adopt a growth mindset throughout my investing journey.
In this post I will explain what I think it takes to become a better investor, why it’s better to be a “learn it all” investor rather than a “know it all” investor, and the skills you need to develop to become a market beating investor.
‘I’m in, how do I get started’
Who doesn’t want to become a better investor? Well, based on my use of Facebook investing groups and Twitter, not everyone. You (the reader) on the other hand, have taken a proactive step towards becoming a better investor. But where should you start?
It all begins with psychology and your mindset. Psychologist and author of the best selling book Mindset: The New Psychology of Success, Carol Dweck theorizes that people have one of either two types of mindsets that impact interpersonal process and achievement. In life, work, school, parenting or any discipline – such as investing.
Source: https://www.ensemblecoworking.com/post/2019/04/16/failure-mindset
Dweck describes the fixed mindset as a belief that ability is static while those with a growth mindset believe ability can be developed. Rather than trying to prove themselves as the smartest person in the room, those with a growth mindset are focused on stretching themselves to learn and become better.
Having a growth mindset can lift your performance and resilience, while constraining yourself with a fixed mindset can undermine your performance and stunt your growth.
Dweck’s mindset theory is effective at explaining the difference between chronic market underperformers and investors who consistently outperform the stock market. Investing prowess is developed over time. No one is born a good investor. It is just too much of a multi-disciplinary field, combining psychology, intelligence, and discipline, to be left to genes. It takes experience to hone and shape our natural abilities in this area for the benefit of better investing outcomes. It’s not hard to imagine how having a fixed mindset can stunt your growth as an investor. The desire to look smart, which a fixed mindset breeds, leads to major blind spots for investors. It can cause you to give up easily, after a bad month or year on the market. You could miss important lessons a bad investment can teach you, putting you in a position to repeat your costly mistakes. You may feel threatened by the success of other investors, rather than being eager to learn from them.
An investor with a growth mindset will hold onto a stock they have conviction in despite a small setback in the business or a drop in the price of its shares. They also study and find inspiration from the greats of investing, whether its Warren Buffett, Peter Lynch, Howard Marks or a friend that has a sustained track record of success.
A growth mindset in investing will lead you to constantly learn, despite market downturns or a failed investment thesis. In fact, the most successful investors understand that some degree of failure is essential to mastery in this discipline.
I have seen way too many pointless arguments on twitter over a stock’s merits to know a fixed mindset can negatively affect your investing process. Some investors treat their stocks as family members, willing to defend them to the death even in the face of valid skepticism of their bull case. Rather than taking in the feedback and examining its merits and potential impact on the bull thesis, too many investors miss the incredible value contrarian viewpoints can provide to their investing process.
Applying a growth mindset to becoming a better investor
There are four steps to applying a growth mindset in service of becoming a better investor.
Be self aware
Successful investing starts with being honest with yourself. Not to mix capitalism and spirituality too much, we need to get in touch with our “inner investor”. Financial independence is highly dependent on it. You must be honest with yourself about whether you are willing to dedicate the time necessary to first learn the fundamentals of successful investing and then each time you get a stock idea spending more of your personal time assessing whether it is a wise investment. If you don’t do some serious soul searching before deciding to invest you are playing with fire.
If you are not willing to invest the time necessary to improving your investment acumen you do NOT need to forego the fantastic returns of the stock market and rely on low return investments. It may just mean hiring and managing this investing expertise carefully in the form of a financial advisor. I believe the more you improve your own investing expertise, the greater the likelihood you will increase your investment returns. Until you are ready to build your own investing acumen, protect yourself from yourself and hire a financial advisor with a solid track record and whose goals align with your goals – making you wealthy.
Getting in touch with your true “inner-investor” also means being honest with yourself about your risk tolerance, what stage you are in life, your time horizon, and your goals. These factors will determine what investing strategies you employ at different times in your life to be successful in achieving your goals.
To avoid any costly bias in our investing decision making, we must be mindful of our own prejudices or assumptions that could run interference with our process. There is a boatload of prejudices we may each have as investors, with the potential to impede our returns. False analogies are a common culprit of bad investment decisions. The one I hear most often is a sort of confirmation bias. Amazon IPO investors in 1997 were rewarded with 86 times return on their investment if they sold their shares at the height of the dotcom bubble in 1999. That’s a big if. Along with all tech stocks in 2001, the dot com bubble burst and Amazon stock cratered 94% from its all time high. Amazon investors with nerves of steel that held throughout the dot com volatility of the late 90s and early 2000s until today have since seen 548 times return from the lows. Desperate investors often point to this wild ride when their favorite stock implodes. Just because Amazon’s stock recovered to reach unimaginable heights does not mean every downtrodden stock will follow suit. Most stocks that are hit this hard are down for good reason. The Amazon story is an exception, and it is a good reminder to not let our cognitive biases overrun our investment decisions.
Another common investor bias Amazon often plays a central role in is how we sometimes assume industry giants will beat the smaller, market disruptors. In 2015 Amazon closed its webstore business, a SaaS business for small merchants to build their own independent ecommerce stores, when it had to acknowledge they couldn’t compete against the disruptor Shopify.
Another great example is when Peleton’s stock dipped on inaccurate news that Amazon was entering the home fitness market.
Just because we saw something happen once doesn’t mean we should adopt it as gospel. Sometimes it's too early in the story for analogies from the past to be relevant in the present day. Once the “thing” in your analogy repeats itself several times, in a discernably coherent and predictable manner, then you have a pattern that may give you some useful investing insight. More on this later. But until then - know your biases, consider them, but mostly importantly question whether they apply to present day.
Focus on progress over time
A fixed mindset causes us to focus on just a snapshot of time when assessing our portfolio performance. This can cause us to blow a recent mistake out of proportion, resulting in distress and panic. From an investing standpoint, this is death. We never want to be making decisions about our money in panic mode. With a growth mindset, we look at portfolio performance over time. We are happy with progress, looking at where we were before, where we are now and where we are headed in the future.
Growth mindset investors understand there will be some pain along the journey, but that pain leads to learning and improvement. If you adopt a growth mindset your investment performance should improve over time and there is nothing more satisfying than seeing that reflected in growing annualized returns.
Free your mind from the short-term performance of your investment portfolio and focus on learning and continual improvement over the long run. Good results will follow over time.
Learn from others
Research shows that people with a fixed mindset are reluctant to ask others for guidance out of fear that they will look incompetent. People with a growth mindset understand that no one is born an expert, rather people become experts by learning from others.
There are a lot of different ways to learn about investing from others, including courses, advisors, investing clubs and mentors. Some of my favorite, more accessible resources include:
Books: One up on Wall Street (Peter Lynch), The Warren Buffett Way (Hagstrom), The Strategic Dividend Investor (Peris), 100-Baggers (Mayer)
Online resources: Motley Fool, Dividend growth investor, Kiplinger, Financial Samuri
Podcasts: 7investing, Invest like the best, Motley Fool Money, Motley Fool Industry Focus, Pounding the table
Subscription services: CML Pro, 7investing
The other way to learn from others is FinTwit, a term used to describe the financial related conversation happening on Twitter.
There is no question in my mind that engaging on FinTwit makes me a much better investor as it:
Keeps me disciplined and level-headed during market lows and highs.
Helps me discover amazing companies with high return potential that I would not otherwise find on my own.
Helps me research companies I am interested in as potential investments. From understanding a market, the company’s optionality, valuation, or products, FinTwit is always there for me with insight and a helpful hand.
Provides me with contrarian views that help me to test my investing thesis.
Gives me inspiration to continue my journey towards financial freedom.
Curation is especially important when it comes to FinTwit. What voices do you want in your head when making consequential financial decisions that will affect your future wealth? Here are my top follows – @OphirGottlieb, @saxena_puru, @BrianFeroldi, @hhhypergrowth, @BahamaBen9, @jaminball, @TomGardnerFool, @ARKInvest, @7investing.
As you progress and grow as an investor, don’t forget to give back and help others. You were in their shoes at some point and who knows, maybe some of the good karma you earn will bring you some luck in the market. And, no matter how you much you learn about investing, never turn down the opportunity to earn a little luck.
Learn from yourself
The fuel for a growth mindset is mistakes. People with fixed mindsets avoid mistakes like the plague, out of a desire to always look smart. Those with a growth mindset view mistakes as an opportunity to grow. As famed investor and founder of the world’s largest hedge fund Bridgewater Ray Dalio explains it so eloquently:
"I learned that there is an incredible beauty to mistakes, because embedded in each mistake is a puzzle, and a gem that I could get if I solved it.”
The important part of learning from mistakes is the active examination that needs to occur once the mistake is made. All investors have experienced at least one major mistake, but likely more. The natural inclination is to move on, maybe erase all memory of the mistake by selling the shares of the giant wart on your portfolio statement. The world’s most successful investors do the exact opposite:
"We frame the stock certificates of our biggest investment mistakes and we put a plaque on the bottom and that plaque has the transferable lesson learned. Because the value of mistakes lies in the lessons you learn from them."
- Chris Davis, portfolio manager of $24B Davis Selected Advisers fund.
"It's very, very helpful to have mistakes that you notice. I would value them. The natural tendency when you make a mistake is to forget it as quickly as possible. What you should do is do the opposite. You should study it. The best mistakes are the ones you can practice theoretically. But the ones you really, really learn are the ones you feel in your stomach or your wallet, or some combination of the two."
- Bill Ackman, Hedge fund manager and activist investor.
One of my favorite twitter follows, and Motley Fool analyst Brian Feroldi, writes down why he is investing in a company. If the investment doesn’t work out, he goes back to his notes to see where he was wrong.
I write my mistakes down as I make them and then publish them in an annual investing lesson’s learned blog post. Check out my top 9 investing lessons from 2019 and my top 10 investing lessons from 2020. Nothing like a public confession to make the lessons really penetrate my inclination to look good.
Broadcasting your mistakes can help you really ruminate in them. It’s good to allow your biggest investing mistakes turn into scars and serve as constant reminders to prevent you from making the mistake again. There is a lot of value in learning viscerally, especially when it comes to making the best decisions for managing your money.
"Mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people's failures, but it gets much more firmly seared in when they are your own."
- Mohnish Pabrai, investor and philanthropist
I’ve gone to the extreme of holding a small number of shares in some of my biggest investing mistakes to serve as a reminder. Remember that Internet start up that taught me to recognize a bubble? Through leadership changes, business model evolution and even a re-branding, I still have 100 shares at 10% of their peak value sitting in my portfolio. I do not recommend this practice. In my case I sold most of my holdings a long time ago, but rather than selling and making $100 on my remaining shares I decided to hold onto them to serve as a constant reminder of the mistake.
I need to now share something I’ve been dreading including in this post since I started planning it – my biggest investing mistakes. They are embarrassing but I will apply a growth mindset to get over myself and help others learn from my own personal mistakes:
1. Stratasys (SSYS:NASDAQ ) – Did you know that 3D printing is being used to help save lives by printing organs for the human body such as livers, kidneys and hearts? This is all I needed to hear to buy into the hype cycle of 3D printing and make one of the biggest investing mistakes in my journey. I was so bought into the promise of a 3D printer in every home that I bought a book about makers and the burgeoning 3D printing industry to reconfirm the bias I had developed. I chose Stratasys as my big bet in the “post-industrial world” of 3D printing. I bought the stock at its peak of $120, suffering a capital loss of 80%.
Investing lesson: Before pouncing on the latest technology fad for your next investment idea, be skeptical and make sure all the elements of an investment ready mega trend are present. It’s possible to be too early to the party. Sometimes it takes a while for all the necessary elements for mainstream adoption to take hold. Typically, they aren’t all there on the same day. For example, mobile computing has been an important catalyst for the successful commercialization of the Internet. The promise of the Internet was “information at your fingertips”. Well, this was hard to realize when most of us were away from our desktop computers for a long period of time. The arrival of smartphones kicked off the next wave of adoption of the Internet.
2. Luckin Coffee (OTCM: LKNCY) - I made the mistake of getting caught up in the hype surrounding maligned Chinese coffee purveyor Luckin Coffe. According to the “experts” Luckin Coffee was the Starbucks of China. Although Luckin had a differentiated take on the coffee experience, one more suited for the Chinese consumer, the company basically imploded on itself as members of the executive team committed fraud. Fraud can be hard to foresee but in the case of Luckin Coffee there were some early warning signs. I remember learning about some potential accounting irregularities and deciding to stay the course. Well, those irregularities foreshadowed outright fraud and I was left holding the bag as the stock lost 93% of its value in two days.
Investing lesson: Be skeptical when analyzing a new stock idea. If it was a recommendation, question the assertions made by the one recommending it. Don’t look for more evidence of what you like about the company, look for what could be wrong about the company. In the case of Luckin Coffee, evaluating the leadership team would have uncovered a shady history of one of its executives and helped me avoid this mistake.
3. Aterian (NASDAQ: ATER) – My most recent and most painful mistake was buying supposed tech enabled product company Aterian. It wasn’t painful because I lost money, this has happened before, and it will happen it again. It was painful because I made what I believe is a beginner’s mistake far into my investing career.
I invested in this small cap e-commerce company knowing it carried more risk than the other growth stocks in my portfolio. I believed its use of Artificial Intelligence (AI) to build a consumer products company for the modern age offered a lot of upside. Like most small cap companies, Aterian is a very volatile stock. This volatility and my exuberance for a company that was just as susceptible to global shipping challenges post-COVID as any other consumer company led me to throw good money after bad. It turns out Aterian’s fancy AI couldn’t solve good old fashion supply chain problems.
Investing lesson: Don’t catch a falling knife just to average down the cost of your investment. Before pulling the trigger, pick an allotment size for the stock in your portfolio that is commensurate with your conviction and risk tolerance, and stick to the original position sizing. I’m not saying don’t dollar cost average (DCA) but set a schedule for DCA’ing and stick to it. Don’t get tempted by lower prices to buy more shares “at a discount” of your favorite holding. Not staying disciplined to your planned position sizing is the fastest way to lose a lot of money.
Well, that was more cathartic than I thought it would be.
Let’s move from theory to practice. With a growth mindset, how can we become better investors. It starts with understanding the capabilities of successful investors and how you can build them over time.
What makes a good investor? What do you need to learn over time?
1. Be a trend spotter
As investors, we are all trying to predict the future a little bit. In the absence of developing psychic abilities, our best attempt at predicting investing outcomes is to identify and understand major trends that will drive economic value creation and give certain companies some sort of edge. The bigger the trend the better, meaning structural change that is impacting the economy, business and/or society at a macro level. Some of the biggest mega trends in history that created tremendous shareholder value includes electricity, automobiles, and the Internet. Mega trends are not limited to technological breakthroughs, they can also include broader trends such as shifting economic power from one region of the world to another, changes in demographics, or climate change.
Spotting major shifts in the economy, technology or whole industries have brought about the best performing stocks in my portfolio. It is these mega trends that will create significant value over an extended period for the elite companies that are best positioned to ride the wave.
How to become a better trend spotter?
Become a consumption machine. Read, listen, and engage with others on trends that you are passionate about. There are many great futurists, industry experts and well-informed Twitter follows to learn from. My best advice for finding them is to just dive in, devour everything you can – books, podcasts, Twitter. As you get deeper it will become clearer who you can learn the most from. Not to put myself at the same level as the experts out there, but I recently wrote about my favorite investing thematics for the next decade.
2. Be a good evaluator of companies
Once you identify the mega trends that will raise all boats, it’s time to find the one or two special companies that are best positioned to ride the wave all the way to the shore. The factors I look for to identify quality, investable companies include:
Defensible economic moat: A moat is a long-lasting competitive advantage. When company’s have a defensible moat, they can generate strong and consistent profits. There are many different types of moats, a strong brand, patents, low-cost advantage, and high switching costs are just a few.
Strong leadership: When you are investing in a company, you are also betting on the ability of the company’s CEO and leadership team to deliver strong results. Look for companies with experienced leadership that has vision and a track record of driving growth and navigating through tough times successfully.
Solid fundamentals: The top financial metrics I review when considering a stock investment:
Revenue and earnings growth: Is the company capable of growing revenues for the foreseeable future? Is the business model working? For high growth companies in nascent industries, I prioritize revenue growth over earnings, provided the company is investing into growing the business.
Free cash flow: Is the company making enough money to invest and grow its business?
Margins: Are the unit economics of the company good? Do they make money on each unit of whatever they sell?
Debt-to-Equity Ratio: This metric gives you a sense of whether a company has taken on too much debt. If a company is too leveraged, high debt loads can become problematic in an economic downturn if the company is not generating enough cash flow to service its debt.
Return on Equity (ROE): Assessing the effectiveness of a company’s leadership can be difficult from afar. That’s why I use ROE metric to help me evaluate how effective management is in generating profits from the money invested in the company. It helps measure whether leadership is effective at generating returns from the capital invested by the company’s owners (i.e., it’s shareholders)?
Optionality: The more options a company has available to grow over the long run, the greater the likelihood they will become a Multibagger stock. Optionality exists when a company has a second and third act, the potential for a new business or market that keeps the growth going beyond its original idea. You can’t expect runaway returns if the company is a one-trick pony.
Better mouse trap: You can’t go wrong picking the company with the best solution to the problem.
Valuation: We don’t buy stocks in a vacuum. What could be a great company may not be a great investment because of a high valuation. Academic research shows that there is a negative correlation between valuation and share price performance, meaning that high valuation leads to lower future returns and vice versa. This research looks at the stock market in aggregate, not specific companies, or industry sectors. It is important not to generalize as all stocks are not the same. A high Price/Sales (P/S) ratio for an industrial company might signal an over extended or high valuation of the stock, but if a tech company had that same P/S it would probably be considered a deeply discounted stock. When I evaluate a stock I consider its valuation in context – relative to its competitors, historical averages, and current market valuations. Even tech stocks with enormous growth rates that seemingly can do wrong can be overvalued. While I don’t want to buy overvalued stocks, I also don’t want to miss out on a stock that still has a lot of room to grow. How many times have you heard “I wish I bought that stock when I looked at it last year, but I thought the price was too high at the time”. Be willing to pay for quality companies but at a fair price or for a reasonable premium. Quality is not cheap.
Margin of safety: This is an important factor if I ever where to manage someone else’s money. It’s one thing for me to own riskier companies if I’m satisfied with the risk/return quotient. It’s entirely different if the money I’m considering investing in a stock belongs to a friend or family member. I would be mortified if I ran up a large loss managing someone else’s money. To protect capital, I look for companies with a margin of safety, which is a built-in cushion allowing some losses to be incurred without major negative effects. It is basically a safety net for investing.
How to become better at evaluating companies?
The best investors build up a framework over time that they use consistently to evaluate stock ideas. If you are just getting started, or even if you are an experienced investor, there is no shame in stealing from someone else. Just make sure you are stealing from a successful investor.
Keep in mind that there is no single, one size fits all frameworks for evaluating any stock. For example, the framework you would use to evaluate growth stocks is not what you would want to use on a 1:1 basis for dividend stocks. Over the years I have built multiple frameworks for the different styles of investing I employ:
3. Become good at pattern recognition
In 2012, San Jose based creativity software giant Adobe switched from a shrink-wrapped software product model to a cloud first subscription model. At the time Wall Street and many customers were not happy with the move. Prior to launching their creative cloud in April 2012, Adobe’s stock price had languished in the high 20s to low 30s for 2+ years. Adobe has since gone on to become the case study for moving from traditional software sales to cloud subscriptions and delivery. Following the launch of its cloud business, Adobe stock grew 115% over 2 years and 20X over 9 years to present day. This pattern of business acceleration followed by stock appreciation because of the cloud transformation of a traditional on-premises software company has played out many times. Microsoft, another textbook example of this cloud transformation pattern, launched its first cloud service Windows Azure in 2010. Its stock 11 years later is up 10X. Autodesk saw its stock grow 7X in 9 years following the migration of its on-premises software business to the cloud. This pattern is now being repeated by Oracle, HP Enterprise, and Cisco.
Being able to recognize a discernable, coherent, and predictable series of related acts that are emerging into a pattern can improve the probability of your investing hypothesis working out. Becoming more right than wrong is critical to improving your investing outcomes. It’s not easy. Patterns look obvious in hindsight only.
A more current pattern that I’m using to identify promising stock ideas is something called the digital transformation supply chain. Just like Ford doesn't build all the components that go into their cars, developers don't need to build all the infrastructure that goes into their apps. Platform providers like Twilio for communications, or Microsoft Azure and Amazon Web Services (AWS) for compute, storage, and artificial intelligence (AI), have become the supply chain for developers building apps. This pattern of cloud platform companies decomposing the software stack into a set of APIs (Application Programming Interface) and selling them as a service so developers can focus on what customers really want is creating a lot of investor opportunity.
You can check out my six-part series on the Battle of the Digital Transformation Supply Chain Stocks to learn more. Note: this article is almost a year old so the stocks analyzed may not be investible companies today. Do your own research. How to become good at pattern recognition?
Build up a knowledge base of different types of businesses and industries that you can call upon for recognizing patterns. Pick businesses and industries that are of interest because you will need to be intellectually curious to develop the depth required to separate true patterns from anomalies.
4. Maintain a long-term perspective
As we lengthen our investment horizon, the average annual rate of return over that timeline becomes less variable. Financial service provider Schwab studied the highest return, lowest return, and average annual return of the S&P 500 over various holding periods from 1926 until present day. They found that as you move from a one-year holding period to a three-year, 10-year, and finally to a 20-year holding period, the number of negative returns experienced goes down. In fact, there has never been a 20-year period with a negative return.
This means that the longer the amount of time you spend in the market, the more likely you’ll be to receive the long-term average annual rate of return. Sure, investing in the stock market carries some risk, but by extending your time horizon as an investor you’re lowering this risk while stabilizing your returns.
How to maintain a long-term perspective when investing?
Achieving peak performance in any field or practice begins with the right mindset. The best golfers in the game know the most important factor in determining their success begins before they even step onto the course. It starts with having the confidence they are using their physical capabilities to the best of their abilities. Good golfers lean on this confidence when things start to go wrong, trusting themselves and their process.
Good investors also trust their process when the stock market goes south. The very human reaction to stock market drops is to become fearful, often leading to panic selling. I have found the best protection from our lizard brain is to be prepared for inevitable market events that will test our resolve:
Assess your risk tolerance. Being honest with yourself about your risk tolerance is both hard and critically important. If you find it too stressful to watch your portfolio decline, potentially rapidly, to the point where you are not able to sleep at night, adjust your portfolio accordingly.
Have a thesis for your investments and don’t be swayed by short-term volatility if nothing materially has changed with your original hypothesis
Don’t panic sell. Looking at data going back to 1930, Bank of America found that if an investor missed the S&P 500’s 10 best day in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns. Selling and then buying back in when you think normalcy has returned will result in a high likelihood of missing some or all of the 10 best days that will occur over the next decade.
Live thru one market downturn. Not something you can just do on a whim, but there is no teacher like experience when it comes to surviving major market downturns. If you have lived through a couple market crashes like me you know that while markets market decline quickly, they do recover and then some. This experienced truism can keep you clear headed when pundits are telling us the sky is falling.
Investing is a journey. It is filled with ups and downs. Be open to the learnings along the way and your results will get better over time. Thank you for spending some of your journey with me.
Very well written article Matt ! Thank you for sharing :)