Graduation season is upon us. From the next generation of Warren Buffett wannabes, I occasionally hear questions such as “What should I learn to become a great investor?”
Contrary to popular belief, investing isn’t a traditional academic discipline. Money management is hardly a typical major. There are, of course, plenty of “Business Administration” undergrads, but their focus tends to be on running companies, rather than investing in them.
We churn out MBAs like made-in-China widgets, yet few ever become outstanding investors. And don’t even ask about economists — the profession that missed the housing boom and bust, the Great Recession, the credit crisis and the market collapse.
Great investors are savvy generalists. I can think of five fields that are hugely helpful to asset management. If you were to study these disciplines, your understanding of how markets work would greatly improve. And you would be a better investor.
How? You will generate better risk-adjusted returns; meaning, you will get the most bang for the bucks you are putting at risk. You will suffer less from volatility — the stomach-churning ups and downs in the markets that are one part risk, one part opportunity. And you will avoid the typical mistakes that most investors make.
The five disciplines that can help:
Historian: Knowing what has happened in the past (and how often) is an enormous advantage when it comes to investing. It informs you of the range of possibilities, allows you to conceptualize possible outcomes to various scenarios and provides a framework for thinking about market cycles.
Heading into the market bottom in 2003, some market historians warned about a secular bear market. These are the decade-plus long periods of huge rallies and great collapses. Some warned that investors should not be surprised if after a decade, the markets were essentially unchanged, which is exactly what happened.
Think back to the market lows in March 2009. After about a 20 percent bounce off the bottom, quite a few commentators expressed fears that the markets had gone “too far, too fast.” Market historians knew that the median bounce after a drop of 50 percent or more was 75 percent. With that information, you might not have been scared away from equities just before they gained 80 percent in value over 18 months.
Psychiatrist: Speaking of scared: Have you ever sold anything in a panic — then regretted it over the ensuing months? What about the opposite — greedily buying stocks that were screaming higher because everyone else was?
Many investors fall prey to these errors. Fear and greed are the most enduring investor emotions. They lead to destructive behaviors. Carl Richards, a financial planner, sums it up thusly: “Buy greed at tops; Sell fear at bottoms; repeat until broke.”
Not understanding your own psychology is the downfall of many an investor. The best financial plan becomes worthless if you are unprepared for the emotional turmoil that accompanies the ups and downs of markets.
Loading...
Comments
The Washington Post commenting system will be disabled for several hours while system upgrades are made. User will be unable to leave comments during this time.
If you have any problems accessing Washington Post content during this time, please email our Interactivity department at comments@washpost.com.
The Post Most: BusinessMost-viewed stories, videos and galleries int he past two hours
Watchlist
World Markets from
Other Market Data from
Key Rates from
Loading...
Comments