We all want to become millionaires by investing in quality ASX shares, but most of us aren't prepared to do what it takes.
Cut the crap
Investing in shares has proven to be the best way to grow wealth over the long-term — but only if you can match or exceed the market's 'average' return.
Unfortunately, the 'average' direct investing Aussie does worse than the market, or S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
We're wired wrong
Humans have a department in our brain which tells us to think that we are better than Average Joe down the street. It's called the 'illusory superiority', a cognitive bias in which we overestimate our own ability.
For the record, I believe some investors can do better than the market average, but you must have an 'edge'.
In my opinion, we only gain an investing edge by putting in the hard yards. Doing the work.
By turning over more stones than anyone else.
But how much work?
Not-so variant perceptions
From my experience interviewing Australia's best — and most highly paid — professional investors, I can tell you that 99% of us will never be as smart as the 'pros'.
(Note: I'm talking about investors. From a 'technicals' point-of-view, it's tougher again because you're competing against Jim Simons' supercomputer.)
However, even professional investors underperform the market between 86% and 99% of the time.
Why?
These guys and gals bring three university degrees and put in 70-hour weeks to justify their fees. Yet, even they cannot carve out an edge, on average. Obviously, people who invest with these 'average' professionals do worse than average after fees.
So due to the poor performance of professional investors, on average, many good financial advisers will tell their clients to lower their costs. Costs are the only thing you can control right now because investing performance is unpredictable in the medium term.
But what about direct share market investors like you and I?
How can we outperform?
Play to your strengths
The one major advantage we have over the pros is our time horizon. Most professional investors are compelled to act. Buying and selling shares to justify their fees year-to-year, or quarter-over-quarter.
Yet, when we look at the performance of the sharemarket, we measure its success over decades — not days, weeks or months.
So, first of all, you need a long-term mindset.
Second, you should take note of the proven recipes for investing success: small companies tend to outperform larger companies, cheap companies (measured against asset value) outperform expensive companies, and good companies tend to keep winning (momentum).
Next, you should reinvest regularly. A person is sitting in the shade today because they planted seeds for success a long time ago. As the proverbs read, the best time to plant a tree was yesterday, the next best time is today. But investors should plant multiple trees. Investing regular amounts of money is a great way to capture the long-term, gradual rise of the stock market.
Finally, know that your worst enemy is you. You will do things that hurt your chances at success by letting emotions creep into your strategy. For example, the best investments, like Amazon, Google and New Zealand's a2 Milk Company Ltd (ASX: A2M) don't fall to success. It's a hard road to the top, with plenty of ups and downs.
You must have the stomach to watch your investments fall by 20%, 40% or even 80% and keep your cool. It's easier said than done, of course.
If that sounds too hard, just control your costs and buy an index fund.
