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Only four hedge funds beat the S&P 500 Index (28% total return) in 2021.
No doubt the financial market is a complex system, but it doesn’t mean you need a complex investment strategy.
One of the most influential investors of all time, Warren Buffet, has been quoted as saying,
“You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.”
Building wealth can be simple. It doesn't require superior skill, unlimited resources, or a 160 IQ. It requires the conviction to stick with your strategy over the long term when everyone else is losing their minds.
- You don't have to outsmart the market.
- Have conviction when others don’t.
- Patience is a virtue.
Outsmarting the Market
Bottom line: There isn’t a magic formula for outsmarting the market.
Complex investments can work. But the majority of the time they are not a good option for individual investors, especially when there are easy to understand, low-cost options available.
There is an overwhelming amount of academic research proving that the mass majority of investors, professional or not, will not consistently beat the market averages over long periods.
Hedge funds, armed with mass amounts of data, the brightest talent, and complex investment strategies can still lose to index. We can’t all play the markets like Bobby Axelrod, the Hedge Fund manager from the show Billions.
Hedge fund managers are playing a complex game of market timing, macroeconomics, and politics.
They are also buying and selling securities on a daily and sometimes hourly basis. That’s not exactly the game individual investors can/want to play.
A wise reminder to yourself: I cannot predict the future, therefore I diversify.
Being diversified is a wise strategy. It’s as simple as not putting all your eggs in one basket.
Diversifying can help you avoid overexposure to an area that’s suddenly out of favor. What might be popular today, can be a fad tomorrow.
You may have spent some of your childhood years wandering the aisles of Blockbuster.
At one point Blockbuster was opening stores all across the U.S. In the blink of an eye, it was gone. Hello Netflix.
My point is that we can’t predict what companies are here to stay vs. what will soon be a distant memory. That’s why we diversify.
Rather than attempting to guess when or what will perform best at any given moment, we diversify investments to asset classes we believe will perform well over time (even if at different times).
Generally, a large percentage of index gains will result from a few companies. Owning an index can assure you own those stocks.
For example, have included big-name companies like Tesla, Apple, Google, etc.
But the reason we diversify is these companies and industries change drastically over time. Per the chart below:
Attempting to outsmart the market isn’t the most attractive option for investors.
While diversification can't guarantee success, it can help make the road a lot less bumpy.
Having Conviction When Others Don’t
Napoleon’s definition of a military genius.
“The man who can do the average thing when all those around him are going crazy.”
The same can be applied to investing. You don’t have to be a brainiac to be a good investor. You just have to be able to hold your composure when others cannot.
Most of the financial advice you hear is about what you should do now, but the reality is that today really isn’t that important.
What matters most is how you behave over the next several decades.
My conviction is that if I keep my composure over many more decades, I’ll be able to let compounding growth run wild. (I’ve written an illustration on compounding here.)
If we rewind back to the Corona Crash in early 2020 many people panicked and sold at the bottom.
But a lesson I’ve learned is that no matter what your IQ is, it can only take you so far.
If you don’t have the right temperament, you could have easily got caught up in the chaos and sold at the bottom.
Find a simple investment strategy that works for you, and stick with it.
Patience is a Virtue
Patience is another trait that is easy to understand, but difficult to implement. Especially as an investor.
In the novel War and Peace, Leo Tolstoy made a profound observation.
“Patience is waiting. Not passively waiting. That is laziness. But to keep going when the going is hard and slow - that is patience. The two most powerful warriors are patience and time.”
Patience is the most under-utilized as well as the most misunderstood concept for the average investor to understand.
During times of market turmoil, it often seems justified to take some type of immediate, decisive action — just because.
Instead, focus on patience, which could be your most valuable investing skill.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson
Like owning a garden, you’ll have winters, you’ll have hot-dry summers, and sometimes you’ll even have pests. But despite all these factors, it doesn’t mean you throw out the whole garden.
A garden isn’t about complexity, it’s about being intentionally patient.
Treat your investments with a tremendous amount of discipline, fortitude, and most of all, patience.
People tend to naturally lean towards complexity because it gives them a sense of control. The more variables you can manipulate, the better you feel you can control results.
I’ve realized that despite the complicated landscape of financial markets, a good investment strategy does not require complexity.
As Steve Jobs said,
“Some people think design means how it looks. But of course, if you dig deeper, it’s really how it works”
A simple design works. The key is to focus on what we can control (emotions and reactions), not the events, timing, or external forces.
This is not tax, investment, or legal advice. Please consult your a professional