I want to tell you a story.
It's the story of a dozen Nobel prize winners. People who combined their massive intellects and deep knowledge to create a hedge fund that was designed to make a motza.
The name of that fund? Long Term Capital Management.
They had the boffins. They had the computers. They had the strategies mapped out.
They just had to wait, and let the money roll in.
But, well, it didn't.
In fact, not only did it not roll in, but the fund imploded.
It went to zero.
Now, if these masters of the financial universe can't make a buck, how on Earth can we mere mortals do it?
I'm glad you asked.
And, frankly, I'm glad Warren Buffett – the greatest investor of all time – has already provided us with an answer.
Tell 'em what you said, Warren:
"Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
In fact – sorry propeller-heads – I think extreme intelligence can often actually be a hindrance.
If you're used to being right… to solving problems… to being able to bring sheer intellectual force to a problem… I think you actually need to be extra-careful.
Because I think (and, let me name drop, again; Warren Buffett thinks) the key to investing well isn't IQ. It's the mindset you bring to the game.
Now, that's not to say you don't need to understand what you're doing – you absolutely do.
You need to understand businesses, and business models. You need to know a little bit about financial statements. And have some sort of valuation framework.
Temperament can't do that for you.
But after that? Being smarter than the average bear won't help you much. And, honestly, it might hurt, if it turns into arrogance.
Not that arrogance is reserved just for geniuses, by the way.
And it's not the only thing that can trip an investor up.
Which is why it's important to work on our investing temperament.
But what, exactly, does that mean? And what is the right mindset for an investor?
Let's lay it out.
First, you have to know that you're playing the long game. Real wealth is created thanks to the awesome power of long-term compounding. 'Get rich quick' only exists in the realm of scams and gambling… and you're not the one who gets rich!
Second, you have to expect volatility. It will be a bumpy ride. There is no alternative. You need to learn to grin and bear it.
Third, you have to know you'll lose sometimes. Not every investment will work out. Some will do horribly. That's investing.
Fourth, and related, you need to harness the power of probability. Not every company's shares go up. Not every year is a winner. But, overall, the market has always gone up, over time. Let probabilities play out.
Fifth, tune out the noise. The old joke is that economists have forecast 9 of the last 2 recessions. And there are some 'permabears' out there, who, despite the enormous long term wealth creation of the stock market, have been pessimistic for years… even as share prices have continued to climb. But also, ignore market forecasts, macroeconomic conditions… anything, really, that tries to guess what might happen in the short term. See point 1, above.
Sixth, don't chase the 'hot stocks'. When I was a kid, Mum would ask 'If everyone else jumped off the Harbour Bridge, does that make it a good idea?'. There's never a shortage of 'hot stocks' – dot.com stocks in 1999, cannabis stocks a few years back, buy-now-pay-later in 2020. They don't always end badly… but, well, they almost always end badly!
Seventh, don't confuse action with progress. Buy. And then aim to hold for as long as you can (as long as your investment thesis makes sense). Don't chop and change. Don't expect your shares to go up straight away. And if they go down in the short term, don't assume that (necessarily) tells you anything about the long term performance.
Eighth, don't get bored. Seriously, investing shouldn't be exciting! Interesting, absolutely. Worthwhile, for sure. And life-changing, hopefully. But not exciting. If you need a dopamine hit or an adrenaline rush, jump on Facebook, or go skydiving. Investing should be slow, boring and very, very profitable.
And there you have it.
Eight things that aren't necessarily easy to do, but worth working on. Historically, the long term rewards of doing just that have been astronomical.
Or, of course, you can be like Long Term Capital Management. Smart, active… and poor.
Instead, be like Buffett. Work on your temperament. (And we'll be here to help you along the way!)
Fool on!
