Investing Involves Managing Your Behavior and Emotions

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“90% of investing involves managing yourself, not your money.” Nick Murray

Investing in stocks won’t make you wealthy. Your behavior around investing in stocks makes you wealthy, according to Nick Murray, a behavioral financial services professional and author of eight books for financial services professionals. Stocks need your help. The only thing you control – your behavior – is the biggest factor in your investing success.

This is a recurring theme repeated by all great investors – 90% of investing involves managing your emotions and yourself, not your money. A simple investment plan helps manage that 90% so the other 10% can be left alone to grow your money. As Nick Murray said about investors not following a plan, “human nature is a failed investor”.

“Financial success is not a hard science. It’s a soft skill, where how you behave is more important than what you know.” Morgan Housel, author of The Psychology of Money

In other words, behavior trumps other considerations in the pursuit of financial success. “Doing well with money has a little to do with how smart you are and a lot to do with how you behave”, Morgan Housel explains in his book The Psychology of Money. “Engage in the right behaviors and you are likely to succeed. Similarly, no amount of intelligence, savvy, or inside information will save you from the wrong set of behaviors.”

Margin of Safety

Warren Buffett said, “The three most important words in investing are ‘margin of safety’.” That means that you buy stuff like stocks while they’re on sale. That also means paying less than what it’s worth. That means to buy $10 dollar bills for $5 dollars. In a nutshell, that’s the secret to great investing.

“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger the margin of safety you’d need. If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay; but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.” Warren Buffett

The Margin of Safety is a measure of how “on sale” a company’s stock price is compared to the true intrinsic value of the company. You need to be able to determine the intrinsic value of a company and from that value determine a “buy price”. The difference between the intrinsic value and the buy price is the margin of safety.

Margin of Safety is a value investing principle strategy. If the total value of all shares of a company is 30% less than the intrinsic value of that company, then the margin of safety would be 30%. In other words, if the stock price of a company is below the actual value of the cash flow and assets of a company, the percentage difference is the Margin of Safety.  This is the discounted price at which you are buying a share in the company.

The Margin of Safety is the percentage difference between a company’s Fair Value per share and its actual stock price. If a company has profits and assets that outweigh a company’s stock market valuation, this represents a Margin of Safety for the investor. The higher the margin of safety, the better.

Margin of safety is only an estimate of a stock’s risk and profit potential. Most value investors believe that the higher the margin of safety, the better.  And, the larger the margin of safety, the more irrational the market has become. 

One of the keys to getting a great margin of safety is to understand that price and value is not the same thing. Price is what you pay for something, but the value is what you get.

The stock market rises about four out of every five years or about 80% of the time, according to Murray. Said another way, the market only falls 20% of the time. You can fear that 20% or cheer for it.

No one ever got wealthy paying full price or top dollar for assets. Most successful investors got that way buying assets that were distressed, out of favor, and therefore on sale. Unfortunately, few people see it that way. You need to take advantage of the sale during market selloffs and corrections when it occurs. Your money literally goes further because you can buy more share at lower prices that lead to market-beating returns later on.

Managing your emotions and financial planning

It’s paramount to insulate yourself against uncertainty, greed and fear – so that you can prosper by continuously implementing your financial plan, and managing your behavior by not reacting to random circumstances and volatility of the markets.

Failing to financially plan is planning to fail financially. For people in the accumulation phase of life, that means a written, date-specific, dollar-specific retirement accumulation plan, premised on long-term historical returns, according to Murray. Once in retirement, it has to become a retirement income plan which, at historic returns, defends and even accretes purchasing power.

Financial planning is essential to managing your behavior and ensuring your financial success.

References:

  1. https://novelinvestor.com/10-lessons-learned-nick-murray/
  2. https://mentalpivot.com/book-notes-the-psychology-of-money-by-morgan-housel/
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/how-to-invest-margin-of-safety-the-growth-rate/
  4. https://www.liberatedstocktrader.com/margin-of-safety/
  5. https://www.fa-mag.com/news/a-talk-with-nick-murray-20921.html
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