There is no one-size-fits all approach to investing. That much most people know and readily acknowledge. Value seekers, growth hunters, day traders, distressed asset scavengers — there are a zillion investment strategies known to man.…
There is no one-size-fits all approach to investing. That much most people know and readily acknowledge. Value seekers, growth hunters, day traders, distressed asset scavengers — there are a zillion investment strategies known to man.
But while many investors pour their focus into the style of investing they should use, they forget one crucial variable that can throw a wrench into even the best-laid strategies: themselves.
“Know thyself, and to thine own self be true.” Variations of this maxim appear in ancient Greek literature and Shakespeare, but are somehow not etched in stone beneath the columns of the New York Stock Exchange.
Self-knowledge is vital to investing. You can devote hours to soaking up the lectures and advice of legendary money managers, read dozens of books outlining the best investment strategies, and read annual reports until your eyes bleed — but if you don’t have the constitution to act in accordance with that knowledge, it’ll all be for naught.
Between 1998 and 2017, the S&P 500 posted returns of 7.2 percent annually. The average investor earned 2.6 percent annually, barely beating inflation (2.1 percent).
A colorful, diverse universe of great investors. One way to see the value of harnessing your personal quirks and inclinations is by example.
Many of the greatest investors of all time have made their fortunes leveraging their own unique characteristics to their advantage.
George Soros, inspired by the great 20th century philosopher Karl Popper, considered himself a philosopher first and investor second, deriving his investing strategy and his “theory of reflexivity” from Popper. He earned billions using it.
Ray Dalio, founder of the world’s largest hedge fund, was obsessed with deconstructing the economy mechanically, discerning the parts and gears that made it move. That allowed him to make big bets on where the machine was going. That worked, too.
Jim Simons, a world-class mathematician whose discoveries helped advance string theory, decided to apply his academic talents to the stock market. His quantitatively driven hedge fund, Renaissance Technologies, produced some of the most stellar and regular returns on Wall Street. Today he’s worth around $20 billion.
The list goes on. But each of the great compounders above developed unique investment strategies based on their own internal strengths and understanding.
That’s not to say there aren’t some common traits that most of the all-time great investors tend to have in common.
Long-termism. Rainer Zitelmann, author of “The Wealth Elite: A Groundbreaking Study of the Psychology of the Super Rich,” says that a long time horizon seems to pop up again and again when he speaks to the wealthy.
“Of the 45 super-rich individuals I interviewed for my study,” Zitelmann says, “most were long-term investors.”
Unemotionality. Howard Marks, co-chairman of Oaktree Capital Management — which managed $122 billion through June 2018 — and author of the new book “Mastering the Market Cycle: Getting the Odds on Your Side,” agrees.
“Most of the great fortunes in investing are won by taking strong positions and holding on for a good period of time until they work out fundamentally,” Marks says.
Marks should know. A famed long-term investor himself, Forbes pins his net worth at $2 billion.
Having a long time horizon isn’t a personality trait. But actually executing a long-term strategy requires not merely patience, but the ability to master your emotions, primarily fear and greed.
“The thing most great investors have in common is they’re unemotional. The biggest mistakes in investing are emotional,” Marks says.
Independent thinkers. “The ability to make decisions independently of prevailing market sentiment and opinion is crucial to the success of the super-rich individuals I spoke with,” Zitelmann adds.
In fact, an independent streak is required by definition to be a truly great investor. You can’t be great by adopting the consensus.
“Great investing is about seeing things more clearly than other people see them,” Marks says. “Having an insight into what the truth is; a sense for when your truth deviates from what the market thinks — and then the nerve to invest heavily.”
What to ask yourself. Philosophy, mathematics, macro- and micro-economic theories have all been successfully applied to investing. Clearly, there are countless investment strategies that can beat the market.
But knowing yourself, and thoroughly examining whether you’ve got the emotional constitution to succeed, is a prerequisite to any good strategy.
“How do you feel about gains foregone and losses experienced?” Marks says. Once you honestly assess that question, “it’s not that mysterious” how aggressively you should position your portfolio.
What if you don’t have these personality traits? Most people aren’t made like a Howard Marks or a Warren Buffett.
What if, after some probing introspection, you realize that truthfully, you’re prone to buy the latest craze and sell at the first sign of danger? Pot stocks, bitcoin, the latest stock tip at a cocktail party — you find that sort of thing irresistible.
“Impulsivity is a difficult trait if you want to be a successful investor,” says Chris Hyzy, chief investment officer of Global Wealth and Investment Management at Bank of America (U.S. Trust and Merrill Lynch).
Or perhaps you’re not impulsive exactly, but you love action. What then?
“For those who want more activity, what we’ve noticed work is the core-and-satellite thinking,” Hyzy says. Eighty percent goes in a core, rules-based portfolio, and 20 percent in “satellite” investments designed to add growth.
Marks has a different take.
“They should go to Las Vegas,” he muses. “You get much better action there.”
“The desire for action is really counterproductive,” he says. Active investing, day trading, highly leveraged exchange-traded funds and other similar strategies, while these “would pander to their craving for action, I don’t think these are winning strategies.”
The unexamined life. Most people don’t associate investing success with deep self-reflection. Don’t be like most people.
Take the opportunity to look inwards and take a full, honest inventory of the way you are and how you’re likely to behave in extreme situations. It will be more than just metaphorically profitable to do so.
There are some indications that great investors are born, not made. It’s OK if you don’t have what it takes to be an elite investor. Acknowledge that, and act accordingly.
Financial advisors, index ETFs, set-it-and-forget it automatic contributions, retirement accounts, and even a “core-and-satellite” approach can all be great investment strategies if they work for you. But most people shouldn’t try beating the market — their emotions ruin their returns.
“If you have enough money to eat, the role of investing should be to make you happy,” Marks says.