In his Market Wizards books, Jack Swagger interviews an outstanding collection of renowned investors, traders and money managers. The single most common thread that each mentions as being a major contributor to their success is their money management skills.
The challenge is to understand what they mean by money management. The internet is full of definitions, ranging from simplistically useless to overly complex and potentially harmful. In past years, I’ve surveyed my classes for their personal definitions. On two separate occasions a decade apart, we constructed in class definitions that I believe accurately capture what these market wizards meant when they attributed their success to their money management skills.
What both groups of the investors I surveyed agreed upon was the notion that money management is a process. In its most basic form, it involves setting goals, getting organized and executing a written investing plan. Both groups also agreed that money management is very personal and individualistic in nature. It will change over time as the investor’s needs shift, but honesty and candor are essential ongoing ingredients in any effective written money management plan.
My first investor group formulated a money management process consisting of 8 issues constructed as questions that challenged each individual investor to answer in writing in a manner most appropriate for him or herself.
- How do you get your money? What are the sources of your cash flow and are they dependable or variable?
- How do you feel about money? Did you inherit your wealth and see money management as a burden or part of your lifestyle? What is your tolerance for risk?
- Where do you move your money? What percentage of your assets are you comfortable placing in various asset baskets? Do you see yourself as an investor, a trader or a watcher?
- How do you move your money? What are your investment analysis routines and which trading methodology do you employ?
- Why do you move your money? How will you decide it’s time to invest?
- How do you protect your money? What sell disciplines do you have in place? Have you adequately insured yourself and your family to protect all your assets?
- How do you spend your money? What are your lifestyle priorities? How much money will you invest, spend and distribute?
- When will you spend your money? What is your time horizon and does your current estate plan reflect your present wishes?
Ten years later, I surveyed the second class of student investors. Their definition was more concise yet the parallels were undeniable.
“Money management is a written, personally-appropriate financial framework describing the types of investments and strategies that you feel will align with your personal goals, objectives and priorities. These guidelines describe the rules and tools you deem appropriate in managing your wealth. They acknowledge your risk tolerance and the risk management techniques you employ to protect your assets. Finally, they provide an ever-changing lifelong timeline and roadmap recording the methodologies and resources you use to ensure disciplined stewardship of your assets as you attempt to maximize the return on your investments.”
The key take-aways for all you budding market wizards are these:
A. Get organized and put it in writing.
B. Put the odds in your favor by having clear goals, routines and an investment methodology.
C. The roadmap to success requires that you know yourself and know enough to stick to your rules.
Trade well; trade with discipline!
-- Gatis Roze