Over several years at least once a month I would teach a workshop titled, “If what you are doing isn’t working… STOP!” I still get comments and emails from people who attended, watch a video or listened to a recording commenting how true it is that stopping is not easy because we are convinced we are right and the market is wrong. The reality is the market is never wrong now… it may adjust and re-calibrate going forward to realign with the truth as it is revealed, but today the market is right. We have the task of deciding how we want to manage our money in light of our risk, time horizon and belief over time as it relates to the markets swings and trends.
The best analogy for bad investing strategies is that of smoking. Despite the big warning on the side of every tobacco product from the Surgeon General warning about the potential effect on your health, many ignore the warning and keep on using the products to the detriment of their health. Go figure. Throw in the additional data on how hard is to stop smoking and you can see how the process compounds on itself. Investing, trading and managing money in the various markets is much the same way. Every investment comes with a warning tag attached to it from the Securities and Exchange Commission. We ignore it and determine we are smart enough to figure it out. We are determined to be the salmon who swims upstream and wins versus all those lazy trout who float with the stream and enjoy life. Interesting fact about salmon swimming upstream is if they make it, they spawn and then die. While they may have made the trip successfully the end result isn’t quite as glamorous as the salmon believed. Death doesn’t seem to add up to winning in my book. Ignoring the warnings relative to investing and the markets may not end in death, but some feel like it when they lose the money they worked so hard to save.
There are three primary categories for developing strategies for investing money, technical, fundamental and quantitative. You can mix, match or go solo with any of these theories and there are as many combinations as there are dreams. The challenge lies in defining the strategy, implementing it with discipline and managing the risk as it relative to the market’s volatility day to day. What starts out as simple way too often turns complex and we get lost in the analysis and forget it is about managing money. Simple systems/strategies work the best because they are understandable and executable. But, we seem to feel the need to introduce complexity versus simple.
When markets turn lower and the fear factor is introduced into the equation all the logic and strategy tends to get lost in the emotions of the moment. Here is lies the greatest challenge for the investor… emotions, the psychology of investing. I am not talking in the sense of behavioral psychology and teaching ourselves to overcome mistakes with understanding of how emotions create irrational responses when our money is involved. I am talking about not putting yourself in those positions to start with. The psychology of managing risk before you invest. Too much lip service and theory is applied to understanding what people do when the market does ________! If we learn to deal with the market doing ________, what are the odds it will do it exactly like we learned? What are the odds the outcome even resembles what we learned? The real problem with theory is quite simply… REALITY! In science we can perform experiments and obtain definable results over and over again. In the markets the variables are not constant and thus we get a similar result, but never the same result. That is why we have to focus more on the psychology of managing the risk before we invest not after.
I cannot begin to tell you the number of people I speak with that have absolutely no business investing their money in the markets… period. The problem lies in chasing performance or returns versus understanding the risk of the process. I have heard all the statistics, I have heard all the speeches about long term performance of the markets, blah, blah, blah. If you can’t understand, digest, accept and deal with the risk of the investments you will never be there long term to experience the performance of the markets. This boils down to know yourself psychology. If you are not up to the emotional swings that go with investing… buy a CD, Treasury bond or fixed annuity. Why take the risk or brain damage of losing your money.
Investing is a process and unfortunately you are part of the process. The human element of emotions is the challenge for every investor large and small, professional or novice. It take time, effort and knowledge to conquer the process and manage your money in alignment with yourself. If that is not your cup of tea… find another solution.