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Let's take a break from
technical topics like timing systems and methods of measuring investment
risk. Instead, let's focus on some of the psychological facets of
investing. Although market timing is my specialty, I am equally
interested in what it takes for somebody, timer or not, to be a
successful long-term investor.
I think there's
an interesting analogy between the way people drive and the way they
invest money. Good driving schools teach "defensive driving"
techniques. If you know what to look out for on the highway, you greatly
improve your chances for reaching your destination in one piece. Likewise,
I think a good investment newsletter ought to educate its readers
about some techniques of defensive investing. If you know the pitfalls,
you can guard against some of the roadblocks that sabotage most investors.
Impatient
drivers in traffic jams often pay lots of attention to what lane they
are in and how the other traffic lanes are doing compared to theirs.
If the other lane looks like it is moving faster, they often will
swerve over to cut in front of somebody else. Some people do this
repeatedly, taking every opening they can find to get any slight advantage
for themselves. Those drivers may indeed gain a few seconds. But in
the process, they escalate the levels of danger and annoyance to them
and everybody around them. In investment terms, they take on much
more risk in return for uncertain (and possibly elusive) gains.
I think one
of the greatest roadblocks to successful long-term investing is impatience,
and this applies equally to buy-and-hold investors as well as those
who use market timing. Impatient investors watch the market from day
to day like a hawk. But except for market timing purposes, their time
would be much better spent studying what's happening in society and
the world, looking for investment opportunities over the next five
to 10 years. Impatient investors are easy prey. They can be lured
to change lanes, and change lanes again. In their zeal to always be
"on top," these people rarely give any investment or strategy
enough time to perform adequately. And they end up as road kill, often
retreating to the sidelines with money market funds and Treasury bills
while their more patient counterparts build their wealth in the slower
lanes. Patient investors who make investments and stick with them
for years or decades, with or without market timing, aren't likely
to have exciting anecdotes to share at parties. But they are more
likely to retire comfortably. And they are more likely to sleep well
along the way and be able to devote their attention to other things
in life. These people may seem unexciting, but I think they can be
dubbed "Road Warriors Along The Investment Superhighway."
WHAT'S
YOUR STYLE?
Whether you
realize it or not, whenever you take the wheel of your car, you have
a driving style that's all your own. There's a certain amount of risk
you are willing to tolerate and a certain amount of frustration you
are willing to tolerate. You may or may not have much patience for
other drivers who don't behave as you think they should. These are
all emotional factors. They have nothing to do with how you choose
your destination and your route to get there. They are all descriptions
of how you respond and react to external conditions, most of which
you cannot control.
Likewise,
you have your own style of investing. You can tolerate some level
of risk, but you probably get quite nervous once you get past the
boundaries of your personal comfort zone. How do you handle mistakes?
Do you welcome them as an opportunity to learn more about yourself
and about investing? Or, do you feel compelled to find somebody or
something else to blame when something goes wrong? How quickly will
you abandon the route you have chosen in search of something better?
Some drivers will leave a clogged freeway in the hope they can find
any alternative with less frustration, even if they can't actually
see such an alternative route. Likewise, you may be quick to abandon
an investment if it isn't performing up to snuff after a few years
or even a few months or weeks. Perhaps you'll throw your money elsewhere
purely to relieve your frustration. (This is what we call the "I
Can't Stand It Anymore" method of market timing.)
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