Mental Outlook
This is, perhaps, the most important aspect of preparation.
It pays to have an optimistic outlook. Much of the world would never have been "discovered" by Europeans had they not had great expectations. So too, it is with investments.
However, naive optimism needs to be tempered by a realistic management of risk, especially as one always has to make decisions in the face of a series of "unknowables". The trick is to establish a "risk threshold" that is congruent with one's mental make-up. This can only be developed through the experience of many years: successes and failures.
Acting on the basis of one's convictions is also important. Paralysis through analysis is inimical to investment success. Individual investors have a distinct advantage in this respect as they are unbounded by the constraints of portfolio policies, investment committees and risk management apparatchiks ... and nervous clients with short-term expectations.
Virtually all of my best ideas have been generated as a result of personal research. Why?
Time Allocation - make research a habitVirtually all of my best ideas have been generated as a result of personal research. Why?
- relying on my self forces me to undertake more thorough research - this as opposed to acting on recommendations of others in a less critical way
- as a result of my research, I acquire a better understanding of the risks associated with potential investments and can tolerate fluctuations in stock prices within bounds that I set personally
- most important, some of my best ideas have gone against "the wisdom of the herd" or explored avenues unvisited by most analysts
Through many years, I've learned that sustained, consistent effort is required. When earning a wage, I devoted two hours every day to my investment research - usually between 2:00 and 4:00 AM when things were quiet ... and then I put in a full "working" day.
This had several results:
- it put me in a "mental space" whereby I could endure the tedium of pouring through financial reports and the like: the force of habit can dull the drudgery of repetitive, boring work
- over time, it gave me a "sense of the market": it's rhythms, a "view" of the strengths/weaknesses of various sectors, and feelings about the macro socio-economic climate etc.
- after eight years, I began to earn more from investing than my "regular job"
Extensive Reading - new learning is everything
I read voraciously - everything from local newspapers to academic journals. Why?
- to expose myself to a variety of perspectives and ways of thinking in order to broaden my world view - this could range from approaches to investing to learning about community outlooks in various parts of the world
- to develop a broad synthetic sense of the "pulse of the world" ... the so-called "view" referred to by many legendary investors.
There is a trend, especially in these days of segmented communities, to restrict one's sources to those which tend to confirm one's existing beliefs. I make a concerted effort to read out of my comfort zone. Hillary Clinton's ignorant characterization of those who held contrary views as "deplorables" cost her the election as she missed the reality that the US Dream is not working for a substantial part of the population. So too with investing, ignorance can be injurious to one's financial health.
As a small investor, I can break out of the "community of investment professionals" most of whom, I would argue, live in a bubble. This is understandable. With a few notable exceptions, most professionals simply do not have the time to devote to reading beyond their regular channels and are punished when they express views that go against the prevailing grain. Once I tested this by visiting a friend in the investment industry and observed to him and his assistant that I didn't mind paying taxes as they fostered a measure of community well-being despite the imperfections of government. The knee-jerk reaction was predictable. Both were highly educated but I wonder if they had ever given any thought to the community subsidy that had enabled them to achieve their present-day success? The "cult of the individual" can only go so far.
As a small investor, I can break out of the "community of investment professionals" most of whom, I would argue, live in a bubble. This is understandable. With a few notable exceptions, most professionals simply do not have the time to devote to reading beyond their regular channels and are punished when they express views that go against the prevailing grain. Once I tested this by visiting a friend in the investment industry and observed to him and his assistant that I didn't mind paying taxes as they fostered a measure of community well-being despite the imperfections of government. The knee-jerk reaction was predictable. Both were highly educated but I wonder if they had ever given any thought to the community subsidy that had enabled them to achieve their present-day success? The "cult of the individual" can only go so far.
Exercise and Outside Interests
It's important to exercise, if only to get a break from the tedium of research. Further, when one is fit, one can work with more concentrated, sustained effort.
It Takes Time
All of this takes times - years, in fact. It's fairly easy to develop the habit of devoting a set time each day for research - three weeks according to recent behavioural research into the development of new habits.
With risk management, it takes years of experience with losses and gains. I find that I accelerated this a bit by developing the habit of analyzing the underlying reasons for success or failure with each investment.
Experience over time provides one with a "spidey sense" of danger or opportunity. A hint: check out the pedigrees of those in management or on the board and run away, don't walk, when you detect something untoward.
It's Fun
Above, the joy of learning new things and having one's performance measured directly by Mr. Market is liberating. There is a certain freedom associated with taking on personal responsibility for one's financial well-being. I'd not have it any other way.
It Takes Time
All of this takes times - years, in fact. It's fairly easy to develop the habit of devoting a set time each day for research - three weeks according to recent behavioural research into the development of new habits.
With risk management, it takes years of experience with losses and gains. I find that I accelerated this a bit by developing the habit of analyzing the underlying reasons for success or failure with each investment.
Experience over time provides one with a "spidey sense" of danger or opportunity. A hint: check out the pedigrees of those in management or on the board and run away, don't walk, when you detect something untoward.
It's Fun
Above, the joy of learning new things and having one's performance measured directly by Mr. Market is liberating. There is a certain freedom associated with taking on personal responsibility for one's financial well-being. I'd not have it any other way.
