A positive attitude goes a long way in successful investing, if you can manage your attitude then asset allocation does the rest
Isn’t it interesting that in so many instances whether it’s strategies in gaming or competition that even when someone or a team deploys the same strategy as others, the outcome is different? Many times, dramatically different. Granted there are so many factors that go into determining the outcome of a strategy and what factors that we can truly control to affect the outcome. Sports and gaming are great examples, factors such as talent, “match ups”, experience. In fact more so today than ever, data and “number crunching” is a key to gaining an advantage in competition effectively engineering a “win”.
There is a great book and movie on the real life story of how Billy Beane used numbers to defy a rich history and code of baseball scouts and dogma, “Money Ball”. But still, why is it “ team chemistry” or “heart” or other intangibles or unmeasurable factors that people point to as key to winning or losing.
I hope I can convince you that one has access to all the factors to succeed in investing and it’s not so much the finding of some unique or better strategy, or even having more talent. As we wrote about before in previous pieces, time is most important, then the ability to earn and save, and then finally investing.
So why is it so hard for people to be successful in investing? Or is it that its the feeling or emotions that create the roadblock to successful investing? A great writer on Medium who I enjoy, Thomas Oppong, sums it up well that “Happiness or misery is a product of our subjective relationship with expectations and reality.” Investing feels the same and can be viewed similarly in that the gap between our expectations and reality creates an unhappiness with the financial outcomes that we experience. This negativity then directly affects our ability to continue to make the best decisions.
Let’s start with the first decision we make when we invest. This decision is far away more important than the actual “investments” that we make and even then it comes after the actions that set us up “to invest”.
As a refresher, we must 1) earn the money to invest 2) save the money, defer gratification 3) and then finally invest it, rather than it sitting in the bank. Our last writing, “No Free Lunch…”, we went through the immutable laws of investing, Time Value of Money(TMV) and Diversification.
Diversification is what you get from asset allocation. Quite simply you allocate your investments over a number of asset classes. Why? The answer is that these separate and uncorrelated assets will deliver a return together that will have less risk over time than any one of those investments by itself. And its this asset allocation that will represent your attitude towards investing, or specifically the risk you can tolerate to get the returns from investing. Its this gap or lack thereof between what you expect from investing and the reality of what you can get from investing that affects your subsequent attitude or feelings around investing. In all my years, it is this gap that determines the ease and outcome of successful and impactful investing.
Let’s go deeper. Almost all people have more sensitivity to losing money rather than making money. Many studies have quantified this sensitivity to be about 2 times. One feels twice as bad or unhappy about losing a dollar rather than making a dollar. Even though in any short time period the odds of losing money versus making money in that time period may actually be equal. However, over long periods of time, investing must and does pay a return because of the first law, TMV.
Here again we see a mismatch between reality and expectations. Given the right attitude, these short term fluctuations can be viewed as irrelevant and asset allocation gives you the ability to manage the volatility and allow you to actually exploit these movements.
But…an attitude of belief in the long term power of TIME and investing helps you take that positive action. Which would be to either 1) stay the course, which means continuing to earn, save and invest 2) reallocate to underperforming assets 3) earn, save and invest… intention and process rather than an obsession on the outcome.
Versus an attitude of disbelief and the dismissal of TIME. In this scenario the gap between expectation and reality becomes the enemy and as Thomas Oppong exclaims about “ happiness and misery”, “It’s an inside job!.” Here, our negative attitude overrides the asset allocation, overrides our intentions, and ultimately overrides what we thought we knew and we succumb to what we “know we know”. Which is fear of some short term outcome and we’re “LOSING ALL OUR MONEY… SELL, SELL, SELL.” Worse yet, we “see” other people doing better and we change our asset allocation or strategy to do what they are doing.
But the unfortunate reality is that we only “think” we know what they are doing and that their strategy works but it’s not their “asset allocation” that is the success factor but their or our own “attitude allocation” that determines success.
A sage and successful friend has taught and coached a number of successful athletes and he mentions how ,“after a shot is taken and doesn’t yield the hoped for outcome”, people tend to say “I shouldn’t have done that!”, however success was really the commitment to the shot and the outcome was just the final result. He counsels them that they should be happy with the intention and with that positive attitude and belief in the intent, winning occurs!
It’s attitude and intention that makes you a winner. Game, Set and Match!
