Have you ever wondered how great investors think or what they’re doing that the rest of the world isn’t doing? What makes them tick? In this 5-Part Series, we’ will uncover the investment secrets of some of the most successful investors of the last century.
Different Strokes for Different Folks
Most of the greatest investors of our time have chosen very different investment paths. For example, Warren Buffet and George Soros are polar opposites in how they invest.
As a Value Investor, Buffet looks for fundamentally solid, yet undervalued companies. On the other hand, Soros is known for making leveraged, speculative moves So, although both men are considered among the greatest investors of all time, they certainly do things quite differently.
Since there are various types of investors, who invest in different instruments, and even use conflicting philosophies, it may appear that there is no rhythm or reason to how success is achieved. But you have to investigate what lies beneath the surface of the investment success to uncover habits that any one may adopt to improve results.
Habit #1: Lay a Firm Foundation
Investing 101 says that before you invest, you must know your…
- Objectives
- Risk tolerance
- Time horizon
You’ve probably heard this wisdom before, but have you taken the deliberate steps to define these critical points? Identifying these three factors is vital to your investment success.
Failure to lay a firm foundation leads people to taking a backwards approach to investing. They start with an investment that looks good TO them instead of selecting one that is good FOR them. In other words, they look for the shiniest object and hope it works out.
This backwards approach usually leads to frustration when investors inevitably realize that they don’t have the results they were hoping for.
Define Your ‘Why’ For Investing
By identifying your objectives, risk tolerance and time horizon, you’ll define your ‘why,’ as well as your ‘how,’ and ‘when.’
You may have multiple objectives that all need to be prioritized and specified. Your goals may include needs such as paying for college, a down payment for a new home, and funding retirement. This is a personal declaration of the purpose of your money. That’s right, your money…every red cent…should have a purpose.
Risk is Contextual
It’s important to spend some time thinking about your investing temperament, which is simply understanding your personality and how it will affect your behavior as an investor. This is important as it relates to an investment’s potential risk and reward.
Let’s face it, the nature of all investments is the potential for loss. How much can you stand, or afford to lose? How much market volatility are you willing to bear?
Since risk is the very nature of investing, risk must be put into context. Is the construction worker who walks on a plank 50 floors up on an unfinished building taking a risk? You would likely say, “Yes. I could never do that!” But this really means it’s a huge risk for you – less of a risk for them.
You see, risk is relative to competency, knowledge, skill, and experience. What looks highly speculative, border-line reckless to you may look like a golden opportunity to George Soros. He’s obviously highly competent, whereas, you may not be as competent to try your hand at speculative investing.
When is Your When?
Each objective you set will have a different time horizon. For example, if you have a 7 -year old child, you can estimate that your timeline for funding college is when they graduates high school – 11 years from now, through college graduation.
So the start date of when you will need to use that money is pretty well defined; plus, it’s limited to a specific window of time; 4 to 5 years.
Retirement is different though. People tend to think of retirement as a specific date – you know, “I’ll retire on my 65th birthday.” But when it comes to your retirement investments, time becomes a much more ambiguous concept.
You may know when you want to retire, but you have no idea how long you or your spouse will live – so it’s impossible to determine how long you will need to maintain those funds. Today, it’s estimated that the average couple will spend 30 years in retirement.
Develop a Rock-Solid Investment Philosophy
An investment philosophy is what you believe about the market in which you invest. It’s another factor that determines your investment temperament.
You probably have some beliefs about the market, even if you don’t realize it. But you should ask yourself whether or not you’ve ever examined your beliefs to determine if they’re valid or contradictory. If you know your investment philosophy, does it guide the way you invest?
For example, do you subscribe to the efficient-market hypothesis, which argues that markets are rational and the price is always ‘right?’ This belief suggests that it’s impossible to beat the market. Van Tharp, an renowned investment psychologist said, “You don’t trade the market, you trade your beliefs about the market.”
Most amateur investors adopt a mixed bag of beliefs that are, often, contradictory, which leads to failure or lackluster results, at best. If you plan to be a savvy investor, you must build a rock-solid investment philosophy and belief system that governs every investment decision you make at every stage in the investment process and under all possible investment circumstances and market conditions.
Want to learn more? Click here to read Habit #2.
Part 1 – Part 2 – Part 3 – Part 4 – Part 5
