3 Principles of Successful Investors Part 2

This is a continuation of a 2 part series on the principles of successful investors.  Here’s a quick recap of the first article.

1. Faith

The single most important characteristic of successful investors is faith. This includes faith in the markets, in the future, in our free enterprise system, in the ability of good companies to grow their profits, and in humanity.

Successful investors tend to have this confidence and optimism. They see how much humanity has progressed in recent history and tend to see their optimism as realism. They don’t know how things will turn out all right – they just know that they will turn out all right…

2. Patience

The most successful investor, Warren Buffett, often says: “The stock market is a highly efficient mechanism for the transfer of wealth from the impatient to the patient.”

Successful investors tend to focus on having high quality investments and/or advice, and tend to stick with them long term. Part of their belief system is that they don’t know when it’s going to turn out all right – they just know that it’s going to turn out all right.

Struggling investors tend to change their strategy/investments/advice often based on their outlook. For this reason, we consider them to have “STD” – selection and timing disease – the delusion that anxiously searching for the best investment/sector/strategy and timing it right is the key to successful investing.

Studies, such as the Dalbar study, consistently show that the average investor makes only about 1/3 of the return of the investments they own. In other words, 60-67% of lifetime returns are lost by performance chasing, speculative euphoria at peaks, panic capitulation at market bottoms, market timing, buying investments because of recent returns and other similar investing mistakes. These mistakes result from “short term-ism” (short term viewpoint) and cost on average 600 basis points per year (6%/year).

Struggling investors, or as we call them: “investors with STD”, often focus on the cost of investments (fees and taxes), but don’t see the huge cost of their investment disease.

A great example of the problem with “short term-ism” was the markets early in 2009. Did that look like a screaming buying opportunity to you at the time? For patient investors, that was as obvious as King Kong smashing buildings in New York. In our opinion, it was definitely one of the most obvious buying opportunities of the last 70 years and likely the most obvious one during our lifetime. We did publish an article on MDJ in March about “Irrational Pessimism”.

Yet many people that somehow think they are able to time markets (obviously they can’t) missed the early 2009 screaming buying opportunity. By simply having faith, being patient and investing more whenever the market declines, you could not possibly have missed such an obvious buying opportunity.

This was the largest market decline in the last 70 years, which is why it was the best buying opportunity of the last 70 years. Period. If you just have faith and patience that the markets go up long term, you would have had no hesitation in buying more while it is low.

In contrast, investors with STD focus on short term, random market movements, news, chart formations and market timing. They were trying to predict where the market would move next (which is never obvious), so they probably missed the best buying opportunity of our lifetime.

When you compare any 2 investment strategies, you will find that nearly always, the one that results in fewer transactions is the superior strategy. We have been surprised at how often we have noticed this effect over the years.

Fewer transactions are more effective.

This is why, for example, studies consistently show that women are significantly better investors than men.

If studies are ever done, we believe they will show that investors in broad market indexes generally do well, but investors in ETFs will do poorly over time. The ETFs themselves will do fine, but because they are made for market timing and have an average hold of only 12 days, the investors in ETFs will do poorly, in our opinion.

A rather humorous example of this phenomenon happens in families where one person (usually the guy) handles all the investments for both spouses. The portfolio of the spouse (usually the wife) tends to have a higher return than the investing spouse’s portfolio. This happens because he tends to trade more actively with his own portfolio. This tendency applies to investment advisors as well, where their spouse’s account usually has a higher return than their own.

Just like amateur golf, successful investing is more about avoiding mistakes than about making that great shot. As one advisor put it, “My wife and I have almost always had the same investments, except that I’ve done more stupid things in my account.”

The key point is that successful investors are patient with their investments, choose them well and have a long term view.

3. Discipline

Discipline is the decision to keep doing the right things. It is the decision not to do something wrong.

Struggling, STD investors tend to ask: “What’s working now?”, while successful investors care about what’s always worked over time.

Discipline is part of why it is so important to have a long term financial plan and why we don’t take on clients without a financial plan. Successful investors are goal oriented, and therefore planning driven. Struggling, STD investors are market-oriented, and therefore performance driven.

When you know your “number” – the nest egg you will need to have the retirement you want – you tend to be focused on long term financial freedom. This makes you far less likely to be thrown off course by a bear market or market bubble, or the myriad of financial events that happen in the world or in your life. Fundamentally changing the portfolio when your goals have not changed is virtually always wrong, and will depress returns.

If struggling, STD investors have an advisor, they tend to think their advisor’s main job is advice on the selection and timing of investments. Successful investors, however, usually realize that the #1 job of their advisor is not investment A vs. investment B, but to modify the natural tendency of the investor to behave inappropriately.

Behavioural Finance books list many irrational behaviours that result from the logical shortcomings of the human mind. Successful investing requires the discipline to prevent these mistakes.

In short, the behaviour and the belief system of the investor are the key factors in superior lifetime investment returns. Struggling investors are usually afflicted with “Selection and timing disease” (STD), while successful investors tend to have faith, patience and discipline.

* This article is based on our personal observations over the years and the writings of Nick Murray, a retired advisor that I consider to be a mentor. Much of our investment philosophy is based on his principles.

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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Ed Rempel

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching. Ed has written numerous articles to educate the public and his clients on his unique insights into strategies that actually work, instead of the “conventional wisdom” common in the financial industry. Ed has trained more than 200 financial advisors and is considered the Smith Manoeuvre expert in the Toronto area. He has received accolades from Frasier Smith in his book “The Smith Manoeuvre” for customizing this strategy for hundreds of clients. His extensive experience in tax and finance has placed him in high demand. Ed’s team collaborates on each of their clients to help them create financial security and freedom.
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11 years ago

Hahaha… I love this term: STD investors! This is such a great analogy.

“Struggling investors tend to change their strategy/investments/advice often based on their outlook. For this reason, we consider them to have “STD” – selection and timing disease – the delusion that anxiously searching for the best investment/sector/strategy and timing it right is the key to successful investing.”

Ed Rempel
11 years ago

Hi saveING,

It’s hard to put a number on it, because you can’t really separate planning someone’s financial life from their emotional life. Finances aren’t really about the money itself – they are about what it does for your life.

We actually have a life coach in every meeting with a new client. We find it very helpful as part of creating a financial plan in order to help the client figure out their goals and to understand the emotional reasons for them.

Emotional discussion about investments varies a lot with the markets. We have an education process about investment risk that we go through with every new client, but we still spent a fair amount of time reassuring clients early this year. We always say we have the best clients. None sold and only one switched partly to money market, although a couple skipped their regular RRSP contribution.

Early 2007 was the opposite, with quite a few clients wanting to get more aggressive or invest large amounts after the big gains in the last half of 2006.

If I were to guess, I would say 20-30%, but many discussions are a blend of financial and emotional.


Ed Rempel
11 years ago

Hi Alexandra,

Yes, we’ve had a lot of fun with the “STD” acronym. :) Thanks for your comments.


Mrs. Money
11 years ago

I think these principles are not only good for investing, but also life!

saveING.ca This is why I signed up with ING Direct
11 years ago

hey Mr. Rempel, questions for you;

When you sit down with a client to discuss finance, what percentage of your time do you spend doing psychological work, ie educating, and selling people an idea?

11 years ago

I love this way of looking at things. Your emotions really do have a huge effect on your actions — if they didn’t we’d all do all of the right things all the time.

Ms Save Money
11 years ago

Agreed – patience and faith – but sometimes very hard to have when the market is falling and your money is slashed in half.

11 years ago

Great series Ed. You’ve got me interested in investor behavior and psychology now.. can anyone recommend any books on the topic for an amateur investor such as myself?


Mark Wolfinger
11 years ago

This series has convinced me that you are not a serious financial blogger. I’m unsubscribing.

11 years ago

I love that the struggling investors have been labelled with an STD – lol.

I like this triumvirate. But I think that patience and discipline need to come first ;-).

The “faith” part I still have issues with, only because the investors with STD also have faith – it’s just that they have faith in their own ability to time the markets and pick those winners – even if history and past performance has proven them wrong.

The part that is tough about patience and discipline is that we live in a very “now” society, where instant gratification has become the norm, and delayed gratification is for suckers. Why wait to purchase something if you can get it right now on yoru credit card? We are so used to that model of purchasing, that I think people feel the same way about investments. Why wait thirty years for an investment to slowly grow, if you can just pick the time when a certain stock is going to explode, and become rich overnight?

Great article.