There are different ways to categorise this journey. I think in terms of four stages. Information. Knowledge. Wisdom. Expert.
At the first stage you gather lots of information, as illustrated in the drawing above. You are a novice. It’s a bit of a jumble but it’s exciting. All of these opportunities to make fortunes and so many people willing to share their ideas with you, and all of them very compelling, at least on the face of it.
Stock tips in the Telegraph, futures trades in chat rooms, and everywhere whispers on biotech break-throughs.
Investing seems so easy. Money for old rope.
The outcome? Perhaps the odd win, but ultimately frustration and poor performance if not mounting losses. You soon realise that you might as well throw darts at the back page of the Financial Times for investment ideas. So, you put a bit of time into joining up the dots…
At the second stage you gain the knowledge to work out how this information fits together.
You now get that investment isn’t easy, so do a bit of book work to fill knowledge gaps – just as you might do, or have done, in your working life.
You better understand the ups and downs (risk), and the key technical terms. You are also more discerning about to whom you listen – you are less like a child given free rein in a sweet shop!
But any success is moderate, and looking at your holdings as a whole you observe little rhyme nor reason for your choices. It’s a bit of a hotch-potch and surely, you come to think, this is not what successful investing looks like. Someone out there must be doing this much better…
In the third stage you gain the wisdom to understand which investing processes actually work.
To quote from Yogi Berra, you now get that “In theory there is no difference between theory and practice. In practice there is”.
You acknowledge the necessary conclusion of “the 92%” research. This informs us that most fund managers (92% of them) are no better than mediocre most of the time. You accept that separate research (e.g. Dalbar Report) also shows that retail investors (that’s you and I) are also very poor investors, consistently underperforming markets. [By the way, this also includes passive investors, just trying to track market indices, because their timing is terrible]
You now look beyond recommendations “by proclamation”, and others dressed with impressive jargon or colourful marketing. You can do this because you have sought out the evidence on what investment approaches actually work consistently, in practice.
Your chosen process is the one which works best for you – it suits your aptitudes and the time you can (or want to) commit to this task. You are now beginning to play to your strengths.
Crucially you understand the need for a plan, not just to buy but also when to sell. Your plan gives you a focus which was previously missing.
Yet even a prolonged period of success is rudely interrupted by extremes in markets (particularly downward lurches) which knock you off balance, trigger indecision, and you give back too much of your hard-earned profits.
Something is missing, and discovering what takes you on the final leg of your journey…
In the last and fourth stage you develop expertise.
Above all you take on board legendary investor Benjamin Graham’s insight:
"The investor's chief problem - even his worst enemy - is likely to be himself"
This is not an easy stage, as no one likes self-analysis – you might find something you don’t like! But there are elements which will help you in this regard:
- Adapt. You combine a mindset to continually learn with a willingness to adapt, particularly when extreme events unfold, such as in 2020.
- Embrace mistakes. You don’t beat yourself up when you make mistakes – you learn. Your acknowledged mistakes are the foundation of your growing expertise.
- Stop-losses. These might have been built into your plan in the third stage. But now they become much more natural and accepted by you – you even begin to sense a positive feeling after applying a stop-loss.
- Not easily distracted. You do not get unduly distracted by day to day “events” and news headlines, whether predicting Armageddon or promising overnight wealth.
- Future focus. You are intensely focussed on the future. The very act of thinking long-term sharpens your perspective and dramatically improves your short-term decision making.
- Think first. You think first, think slowly and act calmly. You stop twitching at every market downturn or promise of riches.
- No special insight. You accept that investment markets are hugely complex, unknowable in any useful way, and that you have no special insight.
- Control what you can. You no longer guess outcomes, particularly in the short term, and now focus on controlling what you can control.
In many fields, not just investing, people never move beyond the Knowledge stage, including those who are highly qualified in their field. This is because an assumed expertise is joined by over-confidence and a resistance to further learning for fear of seeming incompetent.
For example, many people might regard themselves as being at the top of their game with 20-30 years’ experience in a particular field. But the reality is that they have had one year’s experience repeated 20 or 30 times.
If you are ambitious, and willing to keep learning, you can get to this Expert stage – you might reasonably feel you are already at that point in your journey as an investor. I certainly see Gold Members at this level already.
There is no reason why you can’t be ambitious and work your way along these four stages. Importantly, we are here to help you do just that.