What do you want to do? What do you want to own? What is your approach? These seem like simple but are actually complicated questions. Although you and I can study the processes of great investors like Warren Buffett for example and even own some of the same securities, we cannot be Warren Buffett as we have to follow our own journey and live with the results. The investing world is outcome oriented, but to be successful over time an investor's decision making process must be personal, disciplined, adaptable and process oriented.
Michael Mauboussin illustrated this concept in a 2004 research paper where he categorized the process used to make decisions (in the probabilistic field of investing) and outcomes as; (a) good decision making process = deserved success or bad break; or (b) bad decision making process = dumb luck or poetic justice.(1)
To survive over the long-term, a successful investor's decision making process and overall approach must fall into category (a) which says bad breaks will come and go but deserved luck will eventually emerge over time. So if you have not done so already, you will need to develop a sound process, knowing that your short-term results will not be indicative of long-term results. Since you are completely responsible for your results over time you must take this to heart in your decision making process.
In an age of information overload, you must learn to source and process information effectively as well as focus only on what is truly meaningful. This is an acquired skill that is influenced by your investment process, background and personal circumstances.
Through experience as an individual investor that will include losses and setbacks you will have the opportunity to figure out what advantages and disadvantages you have compared to professional investors on Wall Street. It is important to have this awareness or to develop this understanding. While individual circumstances vary, there are some advantages and disadvantages generally common to all individual investors which include but are not limited to:
Advantages
1) Ability to enter or exit a position or market at your will assuming you have staying power with your capital. Professionals do not have this level of flexibility;
2) option to hold onto investments for the period of time you choose (minutes, hours, days, weeks, months, years and decades, etc.). Professionals do not have this flexibility due to the fund flows of their investors which they do not control, among other factors;
3) ability to not be focused on meeting or beating performance benchmarks in the near term or over time;
4) flexibility to pursue a strategy that matches up with your strengths, weaknesses and circumstances. Professionals cannot do this as they must live within the constraints of their asset class and investment mandate; and
5) ability to self critique your process and performance in private along with the ability to avoid chasing performance.
Disadvantages
1) In general, less skill and training;
2) less access to timely and quality information along with less knowledge about how to use it;
3) potentially higher information and transaction costs;
4) typically less access to company management teams, experts and centers of influence, among other factors; and
5) performance risk that exists due to lack of sound approach and quality decision making.
My recommendation is that as you develop, alter or refine your process-approach you take the above and other personal circumstantial issues into consideration. Doing so will increase the odds of achieving better long term results. There is also a massive amount of information available on investment approach and process that I will highlight over time. Savvy consumption and application of this information is critical to long term success as investor. The journey is yours.
(1) Michael J. Mauboussin, "Decision-Making for Investors, Theory, Practice and Pitfalls," Legg Mason, Mauboussin on Strategy, May 24, 2004.
No comments:
Post a Comment