“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:
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.