A few days ago, financial writer and former money manager Charles Mizrahi spent an hour interviewing me for his podcast, The Charles Mizrahi Show.
(I’ll provide a link when he broadcasts it.)
Many of his questions dealt with my background, experience and investment methods.
But I found one question particularly thought-provoking: “What, in your opinion, is the one thing most investors get wrong?”
Answering off the cuff, I suggested that most traders and investors don’t adhere to a system. They have no criteria for what they buy. And no criteria for when to sell.
As a result, many are flying by the seat of their pants, at the mercy of the market and their own feelings of hope, greed or fear.
Not having a battle-tested system is a serious handicap for most traders and investors, particularly newbies.
Yet, on further reflection, I’m not sure that’s the biggest thing they get wrong.
It’s their inability to stay emotionally detached from the market.
Investors have a tendency to get too pumped up when the market is roaring and too fearful when it’s falling, which it has a depressing tendency to do from time to time.
These feelings are only natural, of course. After all, we’re talking about real money.
For example, imagine how you’d feel if – at the close of the market each day – a Brink’s truck pulled up in front of your home and security guards unloaded dozens of bags of cash in your living room, representing your unrealized gains in the market that day.
The next day, the truck pulls up again and hauls most of those bags away, representing your unrealized losses that day.
If this continued week after week, month after month, you might get anxious about what was happening with your money.
Even experienced poker players feel emotions as the pot rises and then gets swept away, over and over again during the course of an evening.
In this case, however, we’re talking not about a small-stake poker buy-in but your life savings.
That’s why some financial advisors suggest that you not look at your portfolio too often or, if you do, you not let it affect you emotionally.
That’s too much to ask, in my view.
I look at my investment portfolio each business day, and I’ll bet most readers do too.
I’ve felt the excitement of big up days and the emptiness of big down ones.
It’s not possible to avoid feeling these emotions. We’re human beings after all, not trading automatons.
But there is a key difference between disciplined traders and investors and those who end up taking their lumps – and folding at the worst possible times.
Both good and bad investors feel emotions. But good ones don’t act on them, except in a contrarian way.
For example, if I feel astonished at how badly the market has behaved lately – as was the case a year ago – I know that there are bargains to be had.
However, that only matters if I have the willingness to take advantage of them. And that requires perspective.
Successful investors understand that problems and setbacks are inevitable, unavoidable and unpredictable.
But they have an abiding faith that a diversified portfolio will not only survive but prosper.
So, yes, you have to understand a few things about business and the economy. You have to know a little bit about human psychology. And you have to use a proven system.
But the biggest part of investment success is temperament.
Get that right and the rest of the investing game is pretty easy.
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