I cannot tell you the number of times an investor has asked, "Considering the difficulties of the past few months, do you still believe in your investment process?" These questions always concerned me because I never once considered not believing in my process for managing money just because of short-term whipsaws and volatility. I have written often, maybe too often, that the single most important trait to have for the long-term success of my process was discipline. You must have discipline to stick with your strategy during the inevitable periods when the results are less than perfect. There are two emotions that can override intelligence and consume investors and their money, testing their discipline to stick with the process, and those are fear and greed.
The greed factor drives some into the futile quest to always be right. When their investment flavor of the week begins to taste stale, they start noticing all the other choices around them. The financial media fuels this "grass is greener" mentality by making all investors think everyone else is doing better. Take for example a story in a newspaper headlined, "How One Investor Holds on in Hard Times." The article begins by telling about an investor whose account dropped from $200,000 to $128,000, but "... he didn't panic; instead he held on. Not only have his holdings bounced back, they're up nearly 50% since April 1." The greedy investor reading that would be pulling their hair with frustration that they were not up 50% since the first of April - this guy's approach must be a better way to invest.
But further in the story, you find that the "just hang on and don't worry" scenario painted in the first two paragraphs is not really true. It turns out, our investing hero admits that he has made about 40 trades so far this year, down from 120 last year because of a "lack of time." He has repositioned his portfolio from "overvalued" technology stocks to biotech, and he says the research required to manage his account only takes 20 to 30 hours per week. Is the grass in that pasture really greener?
I often ask investors if they think there is a perfect investment strategy. They always answer "No, of course not." Then they're dumbstruck by the next question, "Then why do you keep changing investment strategies?" With a fearful investor, every time the short-term results are negative they become convinced they're going to lose everything and they retreat to what they believe is a safer strategy. Sadly, their "safe" strategy is probably the worst choice because in an attempt to evade market risk, they fall prey to the greatest risks of all – inflation and inadequate performance. They'll never "lose" money, but their purchasing power will erode over time, and they may suffer the indignity of running out of money late in life. Regardless of what motivates an investor to abandon ship during difficult times, one thing is clear - they almost always jump when the storm is almost over. They tend to suffer through the worst phases of an investment strategy but never hang around long enough to enjoy the good times.
I've said it before and I'll say it again, it is foolish to make long-term decisions based on short-term results and I will always have the discipline to keep that from happening.
Speaking of discipline, here's a fact: I have been on some sort of a diet much of my adult life. I was driving with my wife in the north Georgia mountains the other day and stopped at an old filling station for gasoline. It was a really old out-of-date station where I had to pay for the gas inside. I see some candy bars near the cash register, so I buy one. I knew my wife would not want one, so I was eating it as I approached the car. When I got in, she said, "You just don't have any discipline!" I said, "That is not true because you do not know how many of these I wanted." If you have found a strategy you are comfortable with and have done due diligence in its process, then you MUST also have the discipline to stick with it.
Dance with the Trend,