3 Principles of Successful Investors Part 1

“There are some people who, if they don’t already know, you can’t tell ’em.” – Yogi Berra

Are you one of those investors for whom things just seem to always work out well? Getting superior long term returns seems to take little effort. Whatever strategy you use seems to eventually work. You don’t spend much time or effort, yet most of the time you are feeling quite confident about your investments.

Or are you the type of investor who always seems to struggle? It seems everything you buy goes down right after you buy. When you finally sell, they take off. And the investments you hold long term mostly underperform.

We have often encountered both these types of investors. Struggling investors are far more common. They usually have trouble believing that many investors outperform with little effort. Those that find investing effortless just shake their heads at the frantic activity of struggling investors. This applies to both professional and amateur investors.

Why is it that investing is so easy for some and for others it is always a struggle?

We have found that the biggest reason for this difference is an underlying belief system of successful investors. This belief system tends to result in effective behaviour. The success of the investor tends to result more from their behaviour than from the specific investments they own.

From our years of experience, we can usually get a good idea of how successful an investor is just from talking with them and identifying their belief system, even if we know nothing about their investments.

There are 3 main principles that tend to make up the belief system of successful investors:

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.

This faith tends to give them a long term focus. They don’t need to keep searching for some great investment, do all kinds of transactions or get into the latest fads, because they are confident that their investments and the markets will perform well over time. Whenever their investments are down, this same confidence allows them to just see it as an opportunity to buy more. They tend to get good advice or choose their investments carefully, but then hold them a long time.

How can they outperform so easily? All you need to do to outperform is to own high quality investments for the long term and generally buy more whenever they are down. That’s all! The markets produce a good return over time and so should your investments if they are high quality. At least twice each decade, there will be a significant down market, which is your opportunity to invest more at lower prices. This alone means your return will be higher than the investment itself.

This is usually done with high quality mutual funds, broad index funds, or a well-chosen, diversified portfolio of stocks. We do it with “All-Star Fund Managers” that have all beaten their indexes long term and that we believe are the world’s smartest investors available to us.

Whichever specific investments they have, successful investors tend to have a calm confidence in their investments. The reason this is so important is that one of the single most important factors in investing is to stay invested and keep investing at market lows.

Many investors will make decent returns during a bull market, but then make the #1 mistake in investing by selling after the market tanks and losing years of growth. By selling, they miss the inevitable recovery. This #1 investing mistake is a direct result of not having faith.

Confident investors know that market declines happen, but since the markets have historically risen about 70% of years, declines are never probable. They are never focused on avoiding the next 20% down tick; but rather on being invested during the next 100% up tick.

Meanwhile, struggling investors tend to have a general anxiety about investing, a fear of losing money and a general pessimism resulting from their lack of faith.

They are constantly searching for the right investment, the right time to buy and sell, and use charts to try to market time effectively. They tend to believe that recent trends will continue and tend to “follow their gut”. Most of their information is free information from the news, internet, or other investors. They are always concerned about the “apocalypse du jour” (next crash, Peak Oil, deflation, inflation, etc.), anxious about missing opportunities, scared of losing money, and usually have a grossly exaggerated view of how risky the markets are. They are often “performance maniacs”.

Their lack of faith leads them to many behaviours that tend to reduce investment returns, such as frequent trading, market timing, performance chasing, trend following, lack of diversification, and most significantly, getting caught up in bubbles or selling after a crash.

The key point is that because successful investors have faith in the markets and their investments long term, they focus on participating effectively in the long term market growth. Struggling investors, with all their activity, end up trying to outguess random stock movements.

* 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

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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Tommy
10 years ago

Which fund companies have the so-called “All Star Funds”?

I am quite impressed with some of Dynamic Fund Managers. There’s in particular hedge fund with superior performance over the last 6 years. The performance graph is a perfect straight line heading upwards, EVEN DURING the worst time of Feb/Mar 2009. Now that’s hard to beat!

Amit Kalia
11 years ago

Excellent article. Your faith in the markets make a lot of sense. Kudos on explaining what sets apart an intelligent vs. an emotional investor. Being one of your clients, I invested some time comparing my current and past investments of your All-Star Fund Managers with their respective indexes. I went back couple of years in order to see if index investing makes any sense.

Comparison of All Star Fund Managers vs. respective indexes (on $10,000 investment)

All Star Funds=$129,872= 29.8% return

Index fund=$120,602=20.6% return

Source Globefund.com

Below is my opinion:

Low cost passive investments provide comparable returns.

It does not matter gaining 7-9% over five years or more as result of investing with All Star fund managers, because on a closer look one can see that some of the top notch funds did exceptionally well where as others sucked.

The real gains from investing do not come from choosing best funds based on manager’s performance, they come as result of one’s personality and your principles of faith, descipline and patience.

Amit Kalia
11 years ago

All Star funds=$129,872= 29.8% return

Index fund=$120,602=20.6% return

Please note the correction above.

Gerry
11 years ago

Hi Ed
By “Past public information” I forgot “only”.
Yes you have to have faith in your system or you shouldn’t be trading period. But emotion always play a part in every decision to some degree whatever investment strategies you use.
I am more confident in MYSELF therefore it works better now. I’ve had time to fine-tune it.
1-Looking at charts means nothing because nobody can interpret them the same, there are too many variables.
2-Trend is watching the direction of the stock in question, not the market. “Manic” means volatility so, more trades, not less profit
3-Charting is only a tool, hammers are just as popular today as 50 years ago.
4-The stock market will never be 100% predictable.A stock cannot be consistently volatile or stable.You can always adjust it to a new time frame to trade in, 1 hour or 10 years is a lot of perspective. Some stocks fall out of favour and new ones rebound all the time so the portfolio has to be refreshed constantly.
IMO, that is where the time and expertise come in, no matter what system you use if you want to make profits.

Ed Rempel
11 years ago

Hi Gerry,

“Past public information” would include any chart.

So faith is important for you as well. I take it discipline is also a big factor with the system designed to remove all emotion – is that right?

I’m curious, from the time that you became confident in your system, have you found that in general it works better now or not as well now compared to a few years ago?

I’m interested in your insight into the debate:

Those that believe the market is efficient believe that any strategy with charts won’t work because too many people look at charts and all advantages will have already been done. On the other hand, the market seems more manic and trendy, so it seems like charting strategies that follow trends would work more now. On the 3rd hand, more people seem to be using charts, so perhaps it does not work as well now as a few years ago. On the 4th hand, it is argued that the trend-following chartists are causing the trends and making the market more manic, which may make it work less consistently.

What have you been finding, Gerry?

Ed

Gerry
11 years ago

Ed, I’ve been trading since 1995 and I do not avoid trading Bear markets as my software is set up to trade long or short, I expect to profit in Bear or Bull markets.
I do not look at past public information but at carefully studying indicators in charts and how they behave with the current trends which may be from 3 months to 1 year, I am a swing trader.
You use the word “systematically” as though ii only applies to statistical analysis. Every trader uses a system they prefer.
Sticking to a system that works is what pays off.
You have to have faith that your system works and that the results bear it out.

Ed Rempel
11 years ago

Hi Gerry,

As I mentioned in 16 above, faith is not just about buy and hold. It’s about having faith in your strategy (which it sounds like you do) and using a strategy for the right reasons.

If you believe what you say, that sounds like faith to me.

How long have you been trading? I find people that choose heavy trading strategies often choose those strategies because of a fear of losing money if they hold an investment – although most won’t admit it. Your last comment seems to imply that that you see the advantage of your strategy as avoiding bear markets.

Do you expect to have superior risk/return in the long run, including in bull markets, Gerry?

I have to admit I am not much of a believer in chart strategies. If you believe the market is efficient at all, even the Weak version of the Efficient Market Theory holds that nobody can systematically beat the market by looking only at past, public information. If that is true, then any strategies that relies on charts should not work in the long run.

Having said that, I have a few investors using charts as part of their strategy that have been able to get superior risk/returns. It is not always clear whether or not using the charts is the reason for it.

Ed

Gerry
11 years ago

You are preaching to those who have faith in the “buy and hold ” strategy. I trade by “statistical analysis” and have faith that history repeats itself constantly and is cyclical.
Doing statistical analysis requires a lot of time and effort in acquiring a portfolio, trusting your charts and analyzing their potential. It’s not just rolling the dice.
As for “buy and hold” how well are your GM and Citigroup stocks doing right now, still hanging on?

Ed Rempel
11 years ago

Hi Finavigation,

Your comment made me think about whether the qualities that create success in life are the same for investing.

Interesting comments and you have an interesting web site.

Believing that you control your own destiny is a lot like having faith. You will also see some parallels between my 2nd and 3rd qualities and yours.

I think the difference is that in life, you are doing it yourself, while in investing you are choosing an investment to do it for you.

I think this is why the most common errors are different in life vs. investing. In life, the most common error for most people is the tendency to do nothing, but hope that somehow success will come to us. In investing, the most common error is to changing things far too often.

Changes in investments are often done out of fear – that we are missing an opportunity or that we could lose money. In life, fear tends to prevent us from making changes.

In life, we need to be able to overcome the fear of change, while with investing we need to overcome the fear of NOT doing anything and maintaining faith.

Ed

M
11 years ago

Faith is good but rebalance of your portfolio is very important according to your changing life and changing goals.
keeping aggresive funds with faith that they will out perform the market and retirement is fast approching..faith does not help.
Everybody had faith in Nortel??????