For 30 years ending 2016, the US stock market returned 10.16% pa. Yet the average investor for this same time frame generated 3.98% pa. This is the behaviour gap folks. A 6.18% pa behaviour gap!
Staying disciplined through the gyrations, and heart-stopping rises and falls of modern markets isn’t always easy, yet it’s crucial for your long-term investment success.
When it comes to investing, we look beyond short-term fads, the panicked reaction, the rumoured sure thing and the ‘my gut feeling is to (whatever)’, and we build investment portfolios based not on intuition, forecast or rumour, rather, on research and evidence.
At Baharian Wealth Management, we don’t purport to our clients or prospective clients that we hold the secret sauce to investment management. That we hold market information that no one else does. That we have the ability to beat the market. At BWM we spend our time and energy ensuring the market doesn’t beat us.
Far too many people and firms focus their energy and efforts into pursuing something that is statistically improbable. Their job is to keep you as their investor/client, amused and entertained. It’s nothing more than dinner theater. President Lincoln once said, “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”
There are three key over-arching factors that help us bridge the (6.18% pa) behaviour gap:
- We think about factors rather than forecasts,
- We think about probabilities rather than possibilities, and
- We focus on process rather than the outcome.
We focus our energy on aspects of investment management that we can control; human behaviour, diversification, costs, and rebalancing.
If you want to succeed as a long-term investor, take the time to understand the Taoist concept of Wu Wei, which literally translates to “act without effort”. The practice of Wu Wei are fundamental beliefs in Chinese thought and have been mostly emphasized by Taoism. It means natural action, or action that does not involve struggle or excessive effort – it manifests as a result of cultivation.
Be clear on your investment goals, put in place a disciplined process and plan that is going to help you achieve them, and stick to it – avoid over thinking and avoid the panicked over-reactions (fear-sell/greed-buy). Let the process unfold – it takes time.
Several years ago, Charlie Munger was asked by a probing journalist, “If what Berkshire has done is so simple, why haven’t more people copied it?” To which Munger replied, “More investors don’t copy our model because our model is too simple. Most people believe you can’t be an expert if it’s too simple.”
Long-term successful investing is simple, but not easy.