As featured in the Herald Sun – Friday 16th September 2016.
By David McCulloch – Market educator and consultant to Share Wealth Systems
In last week’s article we looked at how confidence and competence can impact on the progress of developing traders and investors. Investing is largely an experiential pursuit in that learning benefits from being actively involved. Depending on market conditions the first time experiences can vary widely, and in most instances the outcomes have little to do with confidence or competence. First timers are often drawn to the markets with a focus on increasing their wealth through capital gains and perhaps dividends as well over the longer term. This is often referred to as the BHP strategy, buy, hold and pray. Pray that the market or your holdings continue to rise. But what if they don’t? One only has to look at the Japanese markets from the early 1990’s to see how that strategy panned out over the longer term time frame of 20 years.
Clearly there has to be a more sensible alternative than complete inaction, and there is in my opinion. Successful investing over the longer term involves making decisions. How do you learn to make better decisions then if you’ve not been as successful as you initially thought you might be?
Here are some suggestions for your consideration. Be aware of your limitations. The competent know their limits and was best summed up by Dirty Harry, “A man’s got to know his limitations” (Ladies too). A rising tide lifts all boats, and those conditions often hide an investor’s incompetency, despite a high level of confidence.
Knowing the limits of your investing knowledge should also provide a strong desire to learn and grow. After all, it’s your money that you’ve worked so hard to save and accumulate, why wouldn’t you want to learn how to invest so as to minimise the risks? For this to happen you will need to learn some new skills and importantly be open to new ideas. This will be uncomfortable for some as it tests pre-learned biases about what one “should” do.
A willingness to fail and learn from failure is the first step in becoming accountable. Competence grows by facing the breeze and stepping outside your comfort zone. I’m not talking about being reckless, but taking baby steps and a calculated risk initially. Learning from failures will often involve losses which may cause some pain, and that’s ok providing you are willing to pick yourself up, understand the reasons behind the failure and commit to not letting it happen again.
Van Tharp a well know and well regarded trading psychologist has written many books on the impact mindset plays in being successful. Your mindset will determine your behaviours, so it makes sense to have a growing awareness of the impact of those behaviours. This will also allow you to consciously adjust your behaviours to changing circumstances. Imagine knowing a core set of rules designed to make your decision making process easy, and then having sufficient awareness of how to act in changing market environments. These are hallmarks of successful investors.
David McCulloch is a market educator and consultant to Share Wealth Systems