Warren Buffett once said, “Investing is simple, but not easy”.
As someone generally acknowledged to be one of the most successful investors ever, what exactly did he mean by this slightly confusing quote?
The theory of successful investment is relatively simple…
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buy under-valued assets and hold them for a reasonably long period of time, and
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reduce your investment risk by diversifying across a sensible range.
In 2022, it seems easier than ever to use technology to handle the technical side of portfolio management. So, what could come between you and investment success?
Taking account of your human factors
In practice, successful investing is complicated by the fact that we are human and subject to emotions and behavioural biases. During the inevitable times of market turmoil, basic investment theory is simply hard to follow, especially if colleagues and friends are making good money in other exciting-looking investments.
So, what characteristics do successful investors share?
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Patience
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Self-awareness
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Humility
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Consistency / Steadfastness
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Preparedness
Let’s take a closer look at each of these.
Successful investors are patient
A successful investor is aware that the probability of a good outcome increases significantly with time. They know that being invested in an average investment for a long time will usually produce better outcomes than being invested in a very good investment for a short period of time.
Successful investors are self-aware
The successful investor is keenly aware of their personal emotional makeup and biases. They accept that at different points in time they will be both greedy and fearful, and they try to mitigate their emotions. A great investor is both aware and wary of confirmation bias (looking for evidence that supports their own view) and welcomes challenges to their thinking. They may find comfort in being part of a minority view, as majority views can often be wrong. Even so, none of this is easy!
Successful investors are humble
For a successful investor, it’s important to be humble when things are going well because the difference between insight and luck (in the short term) can be difficult to determine, and many investors have been smiled upon by Lady Luck from time to time, resulting in future over-confidence and subsequent changes in fortune.
Successful investors are consistent and steadfast
A successful investor understands that the key aim is consistent returns over time while avoiding infrequent large losses. Diversification helps with this. However, meaningful allocations and portfolio differentiation from peers are also important actions – it is possible to be over-diversified. Again, this is not easy! Having access to an unemotional and tested investment process can improve your probability of good outcomes.
Successful investors are prepared
The avoidance of greed or needing a quick win is key. This can take the form of having some cash on hand at all times as bridging finance or in order to take advantage of unexpected opportunities. In a similar vein, it may mean persisting with poorer-performing assets in the expectation that their performance cycle will turn.
In summary, successful investing is both psychology AND science
Having a grasp of underlying investment concepts and knowing your numbers is important, but understanding investment market technicalities, complicated graphs and financial data are less important than most people realise.
Becoming a successful investor over time has a great deal more to do with understanding and mastering your own thoughts, emotions and resulting behaviour. Taking into account the emotions and biases of others, which in turn affect asset prices and markets, can also be helpful.
Do you need to update your investment strategy?
Use your annual review to double-check your medium- to long-term strategy with your CERTIFIED FINANCIAL PLANNER® professional and don’t hesitate to ask for updates or insights in between reviews. Keeping your ultimate objective in mind and staying the course are both essential disciplines for a successful investor.
By Richard Sparg, CFP® CA(SA)
