Wednesday, 15 July 2015

What does it take to be a Successful Investor?

Most of us are never likely to become the next Warren Buffett or Neil Woodford but that will not stop some from attempting to replicate their success - we can all dream.

So what does it take to be successful?

First of all to be clear, I do not put myself in this category - my report card would probably be marked 'could do better' - so all that follows is what I THINK it takes to become successful.

Legendary US investor Benjamin Graham suggests “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”

It will probably help if you have an interest in personal finance. You will possibly be motivated to read some of the excellent books on the market and follow some of the online investing blogs to learn from the experience of others and expand your knowledge.

There is a great deal written about the world of investing so its probably important to have the ability to sort the wheat from the chaff so to speak. It is not necessary to know everything, or even a lot but it will probably be crucial to your chances of success to understand some of the basics.

For myself, these would include :

  • having a simple plan - a good idea of what you want to achieve & how you will get there;
  • an understanding of compound returns and the importance of patience/time; 
  • the importance of keeping costs low; 
  • maintaining a diverse portfolio and balanced allocation of assets; 
  • understanding market volatility and mean reversion; 
  • and finally, an awareness of your emotional make up combined with the ability to make long term rational decisions.

Maybe this final aspect is going to mean the difference between long term success and falling at the second hurdle for many investors. As some with longer term memories will know from the turmoil of 2008/09, the markets can be extremely volatile which evokes equally extreme emotions even for the most hardened and experienced investors.

I well remember the feelings of late November 2008 when it felt as if the end of capitalism as we know it was just around the corner. I also recall the prolonged market falls of 2000 - 2003 including the accounting scandals involving Enron and Worldcom and, of course, the terrorist attack on the twin towers of the WTC on 9/11.

It is very easy to make rash judgements and decisions at such times which may prove detrimental in the long run.

Of course, its not only market volatility which can lead to poor decision-making. Ben Carlson at Wealth of Common Sense believes "..the majority of people are hard wired to make poor decisions. Many times it’s not their fault, but human nature that causes these poor decisions. If you aren’t aware of your inherent cognitive biases you’ll repeat the same mistakes over and over again".

Ben's new book is on my list of books to read this year (be happy to post a review if you are reading Ben!)

It is said that one definition of insanity is to keep doing the same thing in the same way over and over and expect a different outcome each time - its not going to happen!

I believe emotions are a factor with most investors whether they like to admit to it or not. However, with a little more discipline and a simple but solid long term plan or strategy, it should be possible to neutralise some of these effects.

I often drop into the conversations on some of the personal finance boards such as The Motley Fool - it seems to me that many of the threads end up turning a very simple opening post into the most lengthy and complex response imaginable.

Beware Constant Monitoring

When we first begin our investing journey - purchase our first share, investment trust or index tracker - its only natural to keep a close eye on how its getting on.

However, the more we view our portfolio, the more disappointed we will become. This is because, as a species, we appear to be affected far more by a loss than we get pleasure or ‘feel good’ factor from a share price gain.

Although over the longer term, the markets have risen - however on a day to day basis its probably 50:50 whether the markets will be up or down. Therefore if you monitor your portfolio on a daily basis, you are more likely to become unhappy or disillusioned because the cumulative effect of the downers will far outweigh the lesser pleasures of the uppers.


This effect was explained in more detail by Bargain Value and an excellent post looking at positive and negative emotional balances in relation to investing.


Keep It Simple

So, turning back to the original question - what does it take to be successful?

Obviously, success will be subjective and each person will probably have their own concept of what it means for themselves.

I think it will always help, wherever possible to keep thinks simple and to take out as much ‘human’ element from the investing process and implement an automatic strategy. To achieve this will involve avoiding too much complexity as this will inevitably require more interventions - the simpler the plan, the easier it should be to automate and leave well alone.

This is why I like the Vanguard LifeStrategy approach. It essentially involves just three steps

  • evaluate your attitude to risk
  • select the appropriate fund, and
  • select your low-cost ISA or SIPP provider
Lump sum or monthly direct debit (or both), sipp or isa (or both) and that’s just about it - job done, review in 5 or 10 years time!

While the investor is busy getting on with life, the people at Vanguard will ensure the fund is rebalanced on a regular basis. This means the investor will know their investment will always remain exposed to the risk they selected at the start.

Its true, there will be some managed funds which will provide better returns over time but selecting those funds or managers at the start of a 10, 20 or 30 year investing period will be tricky and is a low percentage gamble.

These are some of my thoughts on what it may take to become a success.

Feel free to share your own in the comments section below - you never know, it could just be a light bulb moment for other readers!

10 comments:

  1. Nice post, John. It is the emotional part of us that really nobbles the ability to make good, long-term decisions which are the core part of investing and wealth-creation (or protection).

    being able to set yourself back from your investments a little is perhaps the most important and hardest part of the process which is why there are so few truly great investors. I am sure there are many investors who analyse stocks better or have a more thorough understanding than a Woodford, Templeton or even Buffett. However, that is not the part that really leads to long-term results.

    I still have not survived (in an investor sense) a market crash having been on the sidelines for the two major ones this side of 2000. Hopefully I will be able to overrule my emotional response when the next one likely comes!

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    1. Thanks for dropping in DD - good to hear your views as always.

      I think for myself, the emotional aspect of investing is possibly the most difficult to manage. I was just about ready to give up on investing in 2003 after the heights of the dotcom boom were wiped away by the following 3 yrs of market slump.

      By 2007, I was starting to re-engage and a year or so later....

      I suppose we have to accept these market dips and volatility as part and parcel of the process. We have had quite a good run for the past 4 yrs so I guess you will have an opportunity at some point to see how you you react.

      As Ben Carlson wrote in a recent post "Everyone wants to be a buy and hold investor during a bull market, but people change their tune when losses set in".
      http://awealthofcommonsense.com/why-buy-hold-works/

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  2. Been investing for just over a year now and I still can't stop myself from checking my investments or tweaking my spreadsheets most days! I know this isn't good but fortunately, when I have made changes to my investments or strategy, they've been for the good, eg switching nearly all of my actively managed funds into trackers to cut down costs.

    Like DD, I've not been directly affected by any major share crashes so don't really know how I'll feel/react but I would hope I keep the emotions at bay! (although I had an investment trust holding from before 2008 but had forgotten all about it so didn't worry about it when the stock market was going pear-shaped haha!)

    Most of my investment portfolio is in trackers, VLS 80 being my biggest holding.At some point closer to my retirement, I'll probably switch most/all my other trackers into the various VLS trackers.

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    1. weenie,

      Back so soon - sounds like you had a great time on the Chinese roller coaster!

      I find the more I learn from reading and the experience of other investors, the more I reflect on my own strategy. As you say, after just over a year your plans have been reviewed and tweaked - I guess in the light of new information.

      I think the LS funds will serve you well over the longer periods.

      BTW, thanks for the mention of the new forum at http://www.forum.earlyretirementguy.com/index.php

      Delete
  3. I have been investing for 20 years and my average return is 8.8% which according to my records beats the return on average of the FTSE 100. I have never invested in bonds or tracker funds and have no intention of doing so in the future. Why? Because I look at the history of the returns on Equities versus the returns on Bonds and over the long run, Equities beat Bonds. Additionally I search out the good/great mangers such as Neil Woodford who have produced outstanding returns. I have listened to the arguments for diversifying and believe they have some merit at appropriate times; I have never deliberately attempted to diversify until recently, but decided to invest where the best opportunities where. Due to entering a Draw down stage, I altered my philosophy somewhat & diversified in the classical way; I can't say that it has produced better returns, in fact worst; so I will ignore in future all the advice that I hear from all the professionals and revert to my former way of investing, which is to target those managers/Shares that I want them to do, which is now to produce a dividend income of 4% plus capital growthh

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    1. Gareth,

      That's a great return over such a lengthy period - well done, you have obviously found a strategy which works well for you.

      It must have been a bit annoying to try out a different approach only to find it produced less return than your tried and tested approach!

      As I often say, there are many ways up the mountain.

      Thanks for sharing your experience and good luck with your drawdown phase.

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  4. Hi John, I think what you've outlined in this article cover all the most important points for investors who aren't really into investing.

    1. Keep it simple ("lifestyle funds" or a simple 50/50 global stock/bond tracker split)
    2. Don't fiddle (adjust back to 50/50 at most once per year, or never if you like)
    3. Forget about it! Go and do something you find less boring instead

    Leave the fiddling to us active investors!

    - John

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    1. John,

      Maybe the principles could equally apply to active, hands on investing also. As Gareth posted above, an active strategy with shares and selectively managed collectives can produce a good result over many years.

      I think much depends on such aspects whether you take an active interest, how much spare time you may have, whether you are the type who can withstand market swings and volatility etc. etc.

      Maybe if investors can find a strategy they feel comfortable with and which basically can achieve their objectives, then tinkering around the edges from time to time will not have too much impact.

      Interesting to hear what others think on this?

      Thanks, as ever for dropping by with a contribution.

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  5. Hey,

    This is a recognizable article. It links to my situation:

    1- have a plan - index investing, invest each month
    2- define an asset allocation in line with your profile and other already available assets
    3- understand volatility and mean reversion: I do understand it, but I have not lives through a 2008 with most of my assets in the stock market. SO, not sure what will happen then. The plan: stay calm

    The one thing missing: satisfy my need to tweak and play with the markets: that is why I foresee a small part of my portfolio to play with. The goal: have some DGI stocks, write covered calls and do some put writing. By doing this, I hope to get enough distraction and adrenaline. that is missing in the index investing strategy.

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  6. Thanks for dropping by BTL - maybe my first comment from Belgium!

    Your idea of a 'play' fund is interesting - maybe 10% of the portfolio allocated to a more hands on exciting style which enables you to leave alone the 90% boring index funds. I'm afraid I do not understand covered calls and put writing so will pass on that!

    Good luck with your strategy and also with your blog.

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