Investing requires careful thought and a well-conceived plan that includes strict money management, a robust methodology and a sound mindset. We sometimes refer to this as the three M’s of investing. Van Tharp a well-known author with vast experience in trading psychology concluded early on in his studies that the mind is responsible for approximately 60% of an investor’s results. More recently he updated that figure and stated categorically that success in investing is 100% attributed to your state of mind. Does that simply mean that if I think like a winner, I’ll automatically be one? Absolutely not, but what he has also written about is the need to find a methodology that is in alignment with your own individual personality.
There is no point trying to adopt a particular style of investing if it is beyond your own personal psychological capabilities. I have seen many individual investors attracted to swift looking investing systems because of the allure of “easy money”. In my opinion, investing without a plan that you are totally in sync with, is the “hardest easy money” you will ever find. In previous articles I’ve discussed some of the ways to help manage the emotional aspects of investing, but what are some of the personal attributes that you might already possess or be aware of that will be supportive of a particular investing style? Many investors have used in the past the B.H.P strategy as I like to call it. Buy, Hold and Pray. Events like the GFC and continued market volatility make that strategy a risky one without clearly defined exit rules to start with, and also remembering that praying is not an investing strategy.
Buying and holding with an exit strategy is a step in the right direction, and is not that far removed from the risk laden B.H.P type of method. Personal attributes suited to this style are patience, consistency and discipline. Patience in letting a position progress over a period of time, consistency to check on that position as required and the discipline to exit when necessary. In similar ways to the three M’s of investing, these three attributes work incredibly well together. Like a three legged stool, if one of those attributes is not well developed, the stool may struggle to hold up when placed under a load. Finding a methodology that makes it easier to practice and develop those attributes will go a long way to achieving much better long term investing outcomes, and is further supported by the work of Van Tharp in, Trade your way to financial freedom.
Simplicity is key when it comes to the investing process. If it’s simple the chances are that you’ll repeat the behaviours and they will become self-supporting along the way. As this occurs, you’re building the legs of that three legged stool. You’re learning to become patient, you’re looking at the calendar and not your watch. You’re focussing on the process and becoming consistent and disciplined to do it all over again.
David McCulloch is a market educator and consultant to Share Wealth Systems.