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Separating investment success from failure

26th August, 2019

Much of the reporting in the financial media does a disservice to investors, in its obsessive quest for news, which can be at the expense of truth.

My commentary is frequently punctuated with references to patience, discipline, long term and other adjectives unlikely to grab attention. This contrasts with most financial reporting which seems to be designed to convince us that we should always be on high alert when, in reality, most of the time things are just fine. 

It’s important to remember that the financial markets drive commentary, not the other way around. Most of what happens daily is inconsequential, but pages need to be filled. 

As an antidote to the constant barrage of sensational drivel I thought it would be useful to write a short article focusing investors' attention on the elements that separate investment success from failure. For the purposes of brevity, I have distilled this to 2 essential things - recognising the opportunity cost of not investing in the stock market and accepting there’s a price to pay if you do. 

 

The opportunity cost of not investing in the stock market

I’m a long-time advocate of investing in the stock market, the long term returns from which have been exceptional, relative to most other asset classes. (source: Credit Suisse long term returns yearbook 2018). There is no pretence to clairvoyance about the future direction of stock markets in this guidance. It is simply a willingness to believe that over the long term, a diversified investment with little activity stands the best chance of delivering inflation beating returns. Buying and holding itself is no elixir – future returns could of course be lower than the past and depending on the timing of the entry one might have to wait longer than average. After ten years of higher than average returns, the chances of the latter are greater. There is no sure thing after all. 

Success at this, as US adviser Nick Murray so eloquently puts it, is a battle between your need for certainty and your tolerance for ambiguity. It’s not an intellectual contest – more a battle of wills. An intolerance of uncertainty will require you to hold more cash. Greater forbearance for it will direct you to allocate more to the stock market. It needn’t be any more complicated than this.

But decide one way or the other. A default position to hold only cash because of an unwillingness to make a decision (or take advice) has a significant opportunity cost over the long run. If you recognise, and accept this cost, that’s fine. But don’t confuse the certainty of cash for security. The certainty of deposit returns which are barely above Zero, provides little security against rising costs. 

 

The price to pay if you do invest

No more than you can enjoy the benefits of exercise without some form of discomfort, there is a price to be paid for enjoying the spoils of investing. Just as you might treat the ‘six-minute six-pack’ fitness ads with a reasonable dose of scepticism, you should treat promises of paths to easy riches with the same raised eyebrow. If you do decide to invest in the stock market, there is a price to pay; returns do not come for free. Stock markets demand a price and extract that payment in the currency of uncertainty, short-term loss, regret, fear and temptation.

It is not enough that you acknowledge this truth. Living with it is what will count.  You may resolve to exercise more every January but sustaining that through the year is much harder than one imagines from the vantage point of a high stool in December. Even more so with investing, where the link between actions and results is fuzzier. 

You must trust that the path you’ve chosen is the right one, and not give in to the inevitable periods of turbulence and associated drumbeat of negative media commentary. Stock market mis-pricings can persist for long periods. You don’t want to conflate “hasn’t worked in the short term” with “won’t ever work”.

You can’t control what the market does, but you can control your reaction. My philosophy has always been that investors are their own worst enemies. The real key to good investing over time has less to do with the investments you pick so much as how you manage your behaviour; a process that is inevitably improved through engagement with an adviser. 

Progress happens slowly and imperceptibly. Setbacks happen fast and are hard to ignore (if you are watching too closely). The price the stock market extracts appears higher if your vantage point is too close, so stand back, or better still, entrust oversight to an adviser. But above all else – decide to participate, and accept that either way there’s a price to pay.

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