By: Pieter Hundersmarck, portfolio manager at Flagship Asset Management
As we enter a world of rising interest rates, recessions and bear markets, what are the traits that investors need to successfully navigate their new paradigm?
Or, to put it differently, how do you make sure you don’t make critical errors with your investment portfolio during this time?
The most important – and most obvious – a piece of advice is to have a long-time horizon. While trite, this is absolutely the best advice there is.
However, though often mentioned, it is just as often ignored. Most investors will insist on fiddling with their asset allocation at times like these, hoping to jump out of falling stocks and jump back in when the markets rise. Some will be successful. Many will fail.
So, thinking more deeply, what traits enable you to feel confident enough to stick to a long-time horizon? There are a few that I’ve found that work.
The first trait is intellectual honesty.
In other words, learn the right lessons from your successful and unsuccessful investments, and don’t change what works. For 90% of people, an honest reflection will demonstrate that your time horizon was the main contributor to making a profitable trade.
Some investments are profitable and some produce losses. In both outcomes, the wrong lessons can be learned. For example, investors who profited from GameStop felt clever when the stock was lifted by the ‘meme’ investment craze of 2022, when narrative trumped reality for a brief time. In reality, the profits from this trade came from enormous short covering rather than skill, which, for a brief time, made a few investors look clever.
Another example is the one of a 20-year-old college student who raked in a $110 million profit on a stock called Bed Bath & Beyond after investing $25 million in the meme stock. The reality was it was a short-term, high-risk trading strategy executed on a fatally flawed company.
Your investment track record is your lived experience. It’s important that each trade is dissected, and your success – or failure –analyzed truthfully. If you have accurately called the bottom once and made – or lost – a buck, recognize that this was probably short-term luck. When you can invest profitably, repeatably, over many cycles, you’re deserving of the title of being a good investor.
Learning the right lessons, like how random the markets can be in the short term, should help give you the discipline to stick to long-term investing.
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The second lesson is to resist blindly following the trades of others.
Following trades of investment gurus or investment billionaires is fine – as long as you know why they made the trade and if it is true to your investment philosophy and time horizon. Often there are portfolio effects, long/short strategies and short-term trades mixed in with sound investment picks made by many of the world’s top money managers.
There are also just plain mistakes. Investors who followed a strategy of replicating the trades of Warren Buffet, Peter Lynch or Jim Chanos have done well, and have been wise in so doing. But they would have been poorly served by following the trades of Mayoshi Son, Bill Miller, or Bob van Dijk.
Following a billionaire’s trades only work when you follow the right billionaire.
My advice: define your own trade and know when you want to exit it. If you whipsaw between replicating the trades of investment gurus, you could find yourself becoming a short-term trader in no
time. You may also find yourself lacking conviction when the time comes to buy if the share weakens – often the time when a share offers the most upside potential.
The final, and most important trait is to get rid of your FOMO. Fear of Missing Out drives investment decisions more often than you might think. However, avoiding FOMO could well be the most important investing skill at this time. Isolating yourself from focusing on the success of others, especially when that success is sudden, rare and seemingly easy, is superpower; so formidable and significant that it’s practically impossible to do well over time without it.
Charlie Munger once said: Someone will always be getting richer faster than you. This is not a tragedy… The idea of caring that someone is making money faster than you are is one of the deadly sins
Investing for the long-term really is your best friend, particularly during times like these. To be true to this perspective you must be convinced that your long-term strategy gives you the ‘edge’, implement your own long-term trades rather than following others and avoid FOMO. If you follow these three investment tenets, you will be better equipped to stay the course.