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We often hear and read what is important to achieve investment success. In this post, however, I want to delve into something a bit more unconventional but equally important and that is 5 things investors should ignore.
Beating The Market
A common fault of many investors is the fixation about consistently generating investment returns that are superior to those of the broad market and other investors. This competitive mindset can be detrimental.
Consistently outperforming the market is extremely difficult. To do so often requires as much luck as skill (often more luck than skill).
Instead of trying to consistently outperform everyone else, focus on meeting your financial objectives and goal and structuring an investment portfolio that aligns with your risk tolerance. Avoid the temptation to chase high returns or following the latest fads. Structure an investment portfolio that will enable you to withstand major downturns.
Trying to maximize investment returns should only be undertaken if losses will not threaten survival. History is littered with casualties who once ‘had it all’ but then ‘lost it all’. Some people bounce back but they are more the exception than the rule.
The equities market is a complex system influenced by multiple forces. Trying to outsmart this complex system can be exhausting and futile.
Successful investing has nothing to do with:
- Outperforming other investors;
- Obsessing with purchase/sale prices;
- Worrying about short-term performance;
- Academic qualifications; and
- Intelligence levels.
Successful investing hinges on maintaining emotional discipline and freeing oneself from unnecessary stress and distractions. Much of what we see in the media or on social media is totally irrelevant. Tune out the noise.
Recent Performance
We are all guilty to some extent of frequently checking the performance of our investments. Constantly checking our portfolio is a complete waste of time. Share prices are not a reliable indicator of how a company is performing in the short-term and even less so about a company’s long-term potential.
In addition, avoid social media updates from people telling us about their ‘successes’. Social media ‘influencers’ boasting about their new found wealth and trying to ‘sell’ you on their ‘highly proven wealth creation system’ do nothing to help you on your journey to financial freedom. These social media posts generally create a sense of urgency and envy, both of which will work against you.
Highly successful long-term investors all experience multiple market corrections and economic downturns. They are successful over the long-term because they focus on their long-term strategy. Despite the inevitable setbacks they allow their portfolio to grow and to outpace market averages.
Successful investors recognize that investing is a marathon and not a sprint. Short-term share price fluctuations are a normal part of investing. What matters it our ability to set aside emotions and to stick with our long-term investment philosophy.
Please refer to my recent Time Is The Secret Sauce To Building Wealth post.
Performance Comparisons
Investors should view themselves as runners in a race. Every runner:
- is on a different track;
- encounters different hurdles;
- starts at a different time/place;
- has a different finish line;
- does not start the race with the same level of preparation; and
- can withstand a different level of pain (risk tolerance).
It is, therefore, unfair to compare our progress to that of others because it is meaningless and unfair.
Trying to keep up/pass other investors could lead us to make poor investment decisions.
Remember that most of social media is clickbait. Be extremely wary of social influencers with large followings as they often lie just to grab our attention.
Anchoring
Anchoring is a cognitive bias that can manifest in various ways and can lead to suboptimal investment decisions.
- Initial Price: An investor might fixate on the initial price paid for a stock and use it as a reference point for all future decisions. This can lead to the irrational decision to hold a losing investment longer than is wise, just to break even.
- Price Targets: Analysts' price targets can act as anchors. If an investor reads that a stock is expected to reach a certain price, they may irrationally hold onto this prediction, despite changes in market conditions or company performance.
- Past Performance: An investor might anchor on a stock's past high prices, thinking it is a bargain at current lower prices, without considering changes in the company's fundamentals or market environment.
The price you pay for a stock is irrelevant to your current decision making process about the same stock. What matters is the company’s future potential.
We all make investment mistakes at some point. Realizing we made a poor investment decision but continuing to have exposure just because of the higher price paid is irrational.
Good investors focus on the present and the future and not on the past. Investments must be evaluated on business quality, underlying fundamentals, and long-term prospects versus the price paid.
Having this mindset helps us make more objective and profitable investment decisions.
Educational Qualifications and IQ Levels
There is a common misconception of the need to be highly educated or to have a high intelligence quotient (IQ); IQ is a measure of a person's reasoning ability. An IQ test is supposed to gauge how well someone can use information and logic to answer questions or make predictions.
A person’s emotional quotient (EQ) often plays a more crucial role than educational qualifications and IQ Levels.
EQ measures a person's emotional intelligence which is the ability to understand, use, and manage emotions in a healthy and productive way.
The best investors are undoubtedly intelligent. Their success, however, is attributed more to their temperament than their intellect. They are generally known for their patience, discipline, and ability to stay calm under pressure. These are all hallmarks of high EQ individuals.
Some people are highly successful in their career and have a stellar educational background. Controlling their emotions is a challenge, however, and they make one poor decision after another.
To become a successful investor, we need to control our emotions. Focusing on building emotional resilience is essential in order for us to manage fear, greed, and envy and to make decisions based on data and our investment philosophy.
Final Thoughts
There is a multitude of requirements for an investor to become successful. Equally important, however, are 5 things investors should ignore.
We run the risk of losses from which we may be unable to recover if we chase high returns or follow the latest fads. It is best to focus on our own goal by maintaining a steady disciplined approach. Doing so increases the probability of achieving success. Structure an investment portfolio that can withstand major downturns.
Avoid investment performance comparisons. Everyone is running their own marathon.
Don't make irrational decisions when there is a broad market correction.
Anchoring leads to suboptimal investment returns. Investment decisions should not be influenced by the price previously paid for a stock.
Managing emotions and remaining disciplined often outweigh technical knowledge. Even highly educated people with high IQ levels get into trouble if they suffer from a low emotional quotient.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
