“The investor’s chief problem — and even his worst enemy — is likely to be himself.” – Benjamin Graham
Historically, the summer months tend to be quiet as investor attention turns to vacations and other distractions. As the dog days of summer set in, markets generally shrugged off the Brexit worries and the attempted coup in Turkey and advanced higher around the globe. Corporate earnings (the true driver of investment values in the long run) continued to exceed analyst’s estimates, and personal consumption of everything from houses to automobiles showed resilience.
For many of us, summer usually includes a list of new books to read while lounging at the beach or the pool. Daniel Crosby just wrote a new one that’s excellent. “The Laws of Wealth: Psychology and the Secret to Investing Success”, takes a look at investor psychology and offer readers some excellent common sense tips. Specifically, he offers readers some advice on how to change your investing behavior so that you stick to a plan rather than acting out of fear or greed.
Here is an excerpt of the book’s 10 key guidelines to help investors keep more of their investment gains:
The highs and lows of the market may be out of your hands, but how you choose to behave is within your power, and is an important driver of returns.
Diversification is not a panacea, nor does it prevent your portfolio from falling, even dramatically, at times. What it does is protect you from idiosyncratic risk and losing your shirt on a concentrated bet. Buying a car with an airbag is a good idea, even if you never get in a wreck. Diversifying your portfolio is similarly wise, even if the benefits may not always be apparent.
Risk is not a paper loss. Risk is not underperforming your golf buddy. Risk is not even underperforming a market benchmark. Real risk is the probability of you permanently losing your money. Accordingly, investors with a long time horizon and diversified portfolios are taking on little risk compared to someone with a more concentrated, shorter time frame.
Famed contrarian investor David Dreman found that from 1973 to 1993, of the 78,695 corporate earnings estimates he examined, there was a one-in-170 chance that analysts’ projections would fall within plus or minus 5% of the actual number. The smartest people in the world don’t bother with the crystal ball. Said financier J.P. Morgan of the market’s future trajectory, “It will fluctuate.”
Most people understandably assume that the greatest value offered by a financial adviser is, well, financial advice. Not so. Vanguard’s “Advisor’s Alpha” study shows that working with an adviser provides around three percentage points of outperformance, and that fully half of that value comes from behavioral coaching. Morningstar, Aon Hewitt, and Envestnet all have similar investor studies showing that hand holding is more important than stock picking when it comes to optimizing returns.
John Neff, former head of Vanguard’s Windsor Fund, astutely noted that, “Every trend goes on forever, until it ends.” It has been said that nature abhors a vacuum and an investment corollary is that markets abhor excess. While short-term trends and emotionally fueled investors can push a stock up or down for a time, things tend to come back to Earth eventually. Betting that something will rise or fall in perpetuity is a risky bet.
Many investors are familiar with Buffett’s admonition to be “greedy when others are fearful and fearful when others are greedy,” yet so few of us manage to successfully view a downturn as the opportunity it truly is. There is true joy (and riches) to be had, so commit yourself to continue investing and even increasing your allocation when times are bad.
Nobel laureate Paul Samuelson said it best, “Investing should be more like watching paint dry or watching grass grow.” Research shows that the average IPO in the U.S. has gone on to underperform the market benchmark by 21% per year in the first three years following its release. Emotion makes us a stranger to our rules, and straying from a discipline tends to end in disaster.
Robert Shiller, a Nobel prize-winning economist, is fond of saying that “This time it’s different” is the most dangerous phrase in investing. While mania can carry a market for a time, the truth about what works long-term on Wall Street is pretty boring (think paying a fair price for a profitable company) and is unlikely to fundamentally change.
Benchmarking to your own goals instead of arbitrary external ones has myriad benefits. First off, it personalizes the whole endeavor and makes investing about doing what you love instead of outperforming others. Research also shows that goals-based investors are more likely to stay the course during tough times and even save at higher rates, since what they are chasing is so personally meaningful.
These basic truths are spot on and in perfect alignment with what we’ve always stressed to clients. Our favorites? Numbers 2, 5, and 10. Read them again. Then, enjoy the rest of your summer. See you in August.
The First Coast Wealth Advisors Team