Great investors always have a clear strategy and adhere to it for years.
“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” Sun Tzu
It is important that we learn from the great investors. More importantly, if you have a strategy that works… Stick to it.
But, remember that there are times when one style works best and times when another does. So the take away is: Think flexibly but strategize rigidly. That is, decide which investment style is right for the present, and, once you have decided, stick with that style and the strategy that flows from it. Adhere to what works until it stops working.
Most investors do not follow a financial plan or adhere to an investment strategy. Instead, they collect stocks like a stamp collector collects stamps. They buy what they like or buy what is in vogue. It may be growth stocks or value stocks or blue chips or small fry. When most investors find a stock they like better than the current collection, they trade for it.
“Forget trying to figure out the ideal moment to get in or out of the market. Instead, what really matters is the time spent sitting around in stocks.” John Goodell
You can see why people prefer collecting: It’s embedded in how our brains work from prehistoric times of hunting and gathering. Portfolio management, which goes far beyond diversifying by introducing risk controls. This is a discipline that operates under rules:
- Invest in companies that you both understand and believe will offer long-term value. When buying ownership, you should be able to get your reasoning down on paper without relying on outside resources. You should be able to write down exactly why you plan to invest in that particular company and ignore how the stock will perform in the near term.
- Use a benchmark. Pick one carefully and manage against it. Morgan Stanley World or S&P 500
- Analyze your benchmark’s components. For each stock, think about expected return and risk. That way, you know what to own and how much of it. Think about countries, industries, size and valuation. What you don’t own is as important as what you do.
- Know that you may be wrong. Believers in value investing think theirs is the only way to go. Growth investors feel the same about their philosophy. No style can be right always. Any strategy can fail.
Margin of Safety
“Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical.” Sun Tzu
Build insurance into your investments. In case you’re wrong. And that comes from blending negatively correlated items. In other words, seek something that would go up a lot should other things go down. Then, if your basic premise is incorrect, you don’t get killed. Making up for a decimated portfolio is hard to do. Remember, when you buy insurance, you don’t want it to pay off. You’ll be happy not to need it and just lose the premium. But the insurance really does reduce your risk.
What is the most common investor mistake? Trading–getting in and getting out at all the wrong times, for all the wrong reasons. You’ve heard it before: Most investors are their own worst enemies.
Most mutual fund buyers, for example, badly lag the very funds they buy (and sell) because of bad timing. The average mutual fund holding period for equity or fixed income is only about three years. It’s too short.
The solution is to trade less. Buy into good, well-researched companies and then wait. Let’s call it a sit-on-your-hands investment strategy
Short- vs Long-term Investing
A short term investment is any asset is held for one year or less. Most investors hold short term investments for no more than a few months at a time, if not several weeks.
A long term investment is any asset is held for more than one year. Most investors hold long term investments for several years as part of an overall strategy and financial plan for their portfolio.