Successful investing is about controlling the controllable. You can’t control what the market does, but you can control what you do in response. In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor.
The first step to reaching your financial goals is to make sure you set goals that are reachable. Your expectations must be realistic. The stock market is not going to provide a high return just because you need it to.
The second step is to recognize what you are up against. Despite what all the daily market reports make it sound like, investing is not a game, a sport, a battle, or a war; it is not an endurance contest in a hostile wilderness. Investing is simply the struggle for self-control — the unending effort to keep yourself from becoming your own worst enemy.
The market is not perfectly efficient, but it is mostly efficient most of the time. Attempting to beat the market may often be entertaining, but it is seldom rewarding. There’s nothing wrong with gambling on poor odds, as long as you admit honestly that what you’re doing is gambling and as long as you put only a tiny proportion of your wealth at risk.
The brokers on the floor of the New York Stock Exchange clap and cheer when the closing bell clangs every afternoon because they know that no matter what the market did that day, they will make money — because you tried to. Whenever you buy a stock, someone is selling it; whenever you sell a stock, someone is buying it. Most of the time, the person on the other side of the trade knows more about it than you do.
However, you don’t have to lose just because other people win, and you don’t have to win just because somebody else loses. You win when you stick to your own long-term plan, and you lose only when you let greed or fear goad you into changing that plan.
The right time to buy is whenever you have cash to spare. The right time to sell is when you have an urgent and legitimate need for cash. If you buy because the market has gone up, or sell because it has gone down, you are letting 100 million strangers rule your life with their greed and fear.
Once you lose money by taking too much risk, the only way you can earn it back is by taking still more risk. If you lose 50%, you have to earn 100% just to get back to where you started. And if you lose 95%, you need to earn 1,900% before you break even. You may be able to do that once or twice through sheer luck alone, but the more often you have to try it, the more likely you are to end up broke. All too many people live their investing lives like hamsters on a wheel, running faster and faster and getting absolutely nowhere.
If you want to have more money, save more money.
Investments that outperform in a bull market are certain to underperform in a bear market. There is no such thing as an investment for all seasons. That’s what diversification is for: to protect you against the risk of putting too many eggs in the wrong basket. And buying something that has just doubled, in the belief that it will keep on doubling, is an extremely stupid idea.
Your goals are a function of all your life circumstances: your age, marital status, income, current and future career, housing situation, and how long your children (or parents) will be dependent on you. Risk is a function of probabilities and consequences — not just how likely you are to be right but how badly you will suffer if you turn out to be wrong. Investors tend to be overconfident about the accuracy of their own analysis — and to underestimate how keenly they will kick themselves if that analysis is mistaken. Understanding your own shortcomings as an investor is far more important to your long-term success than analyzing the pros and cons of individual investments.
In the short run, hares have more fun; but in the long run, it’s the tortoises who win the race.