The Characteristics of Great Investors and the 3 Factors that Keep You from Being One
It is during times of distress when I like to remind clients of the characteristics of great investors.
Part of my job as an advisor is to keep people from jumping off the investment train when it is starting to look like it may have lost it’s brakes and is headed downhill.
It is during these difficult times that investors can significantly benefit from a preplanned approach. If they know what they’re going to do ahead of time when the market falls, they’ll be ready and mentally prepared to take advantage of markets vs being taken advantage of.
Here’s an example… We’ve all heard the age old saying “Buy low and sell high,” yet how many investors actually do it? Time and time again we are presented with information that the really great investors buy when things are severely depressed. Why? Because the upside is so much more profitable at that point – yet almost no one does it.
This recent passage from a marketwatch story sums it up well…
“Let’s take a close look at the bull market that began on March 9, 2009. Through the market’s high this past spring, the Dow had gained close to 100% in a little more than two years’time”.
Yet most of us dither over our decision. We think we’re wise, but most of us will do the same thing over and over again despite the fact common sense would dictate otherwise. Never disregard human nature, plan around it instead.
This inability to act during depressed markets is largely due to three factors.
Firstly, the concept of consistency.
As humans we have an innate need to be consistent with our past decisions. Putting money in after something has dropped is not consistent with what we had hoped for in our minds so it is difficult.
Second is the concept of Loss Aversion. Our aversion to loss is much more prevalent when we seem to be going backwards. According to some studies, we are more than twice as likely to fear a loss than to celebrate a gain. So we choose to wait for market stabilization – which of course only returns once the major rebound has occured and we’ve missed our opportunity.
Lastly, we seem to have a voracious need to make perfect decisions vs basically just close enough decisions. Many investors really do want to buy low. Unfortunately they typically try and wait for the very bottom – which they inevitably miss. Once they realize they’ve missed it, they’d rather just wait things out for the next perfect opportunity.
It is likely that we are effected by some of these symptoms whether we like to believe it or not, so why not make a plan to override your human nature.
How about something like this? “When the indexes are down by more than 15%, I will increase my contributions to equities by X% If it falls by another 15%, I will add to my equity holdings by another X%”
You see once you’re got your strategy planned out, you are a lot more likely to follow with what you planned because of that same human need for consistency.
Let’s sum up. When you turn on the news and it has been yet another terrible day on the markets, and you listen to pundits and they can’t find anything good to focus on remember that it is likely our human nature which will be our enemy if not prepared for it.
Finally remember these few things that have been and will likely always continue to be true:
1. Financial success always equates with the habit of saving money. If you are not saving, nothing else really matters as a 100% return on nothing is still
2. The history of wealth building has always involved ownership (whether that be land, real estate, ownership of companies through stocks or mutuaul funds etc). If over the long term you could make more money in the bank, the world would not have developed as it has done.
3. People have in the past made better returns when they invested when things were down and out of favor. Why not get more for your money?
E.O. & E.