Winter 2017 Some Important, Overlooked and Even Ignored Secrets to Investment Success

“The greatest enemies of the equity investor are expenses and emotions.”

– John C. Bogle

A while ago, the brokerage firm Charles Schwab ran a commercial in which a father and son were having lunch. The father asked if the son was doing any investing now that he was making some money. The son answered that he’s “been doing some research.” When the father offered to introduce him to his broker, the son quickly responded, “How much does he charge?” Besides cost, are there any other important factors that affect investment success? Absolutely, and they are often overlooked or ignored. In this newsletter I discuss a few.

Cost is important, yet it is not the only secret to investment success as the Schwab commercial and robo-advisor platforms seems to suggest. Many investors blame cost for investment failure while ignoring the influence of their own emotion. I daresay that even if they could invest for free, many people would still be unsuccessful due to their lack of emotional control. I am eager to know, during and after the presidential election, how many investors were calmed by a call from their robo-advisor? Robots have a hard time being empathetic even if you don’t hang up on them. The influence of emotion, in my opinion, is one of the biggest overlooked factors to investment success and why the hubris of “quant” investing models ultimately leads to their downfall. The influence of emotion is why I believe Schwab, in its advertising campaigns, has pivoted away from an emphasis on cheap trading and toward offering investment help. Trading exacerbates the effect of emotion.

Over the decades, no one has done more to educate us on the importance of cost to investment success than my friend Jack Bogle, founder of Vanguard. Jack has made many contributions to the investment industry and to furthering investor education. Yet costs can be sneaky. It’s not just how much your advisor charges that will determine your investment success. In a past newsletter I warned about the danger of over-paying for an investment’s “packaging” (here). I reminisced about how beautiful the pictures of the food looked on the TV dinner boxes, yet how disappointing it was when you saw the actual food inside. When I think about the cost of packaging, I think of “alternative investments.”

To be successful, every investor and/or their advisor must have a personal Investment Philosophy that guides their decision-making. Do you bat right-handed or left-handed? Are you better suited to growth investing like Philip Fisher or value investing like John Templeton or Warren Buffett? It helps to know before you start swinging. I recommend reading “The Money Masters” (original version) by John Train. It is nine short chapters, one each on the great investors: Philip Fisher, John Templeton, Benjamin Graham, T. Rowe Price, Warren Buffett, Paul Cabot, Robert Wilson, Stanley Kroll and Laurence Tisch. What you will discover in the book is that there is more than one approach to successful investing and one of those styles will likely suit your personality and emotion and positively affect your chance for investment success.

Forming (and/or adopting) an Investment Philosophy will then allow you to create an Investment Process. Our philosophy is the “what” (here) and our Process is the “how” (here). It is your Philosophy and Process that will give you the confidence and patience to “stay the course” during rough seas and minimize the egregious mistakes that can negatively affect your return. These mistakes include, but are not limited to, mistaking volatility for risk (here), the myth of non-correlation and asset allocation (here), selling too early (often known as “rebalancing”) (here), “doing something,” i.e., trading (here), and even chasing performance while “comparing” (here).

Another overlooked secret to investment success is to remember Benjamin Graham’s admonition that as the price of a stock declines it gets less risky not more. This is counterintuitive to how many investors think. Assuming a stock with a declining price has some value, and that you have accurately assessed that value, when the price declines, you will be paying closer to that value and not overpaying. On the contrary, many investors see a rising stock price as “validation” of their thinking. Maybe so, yet recognize you will be paying more for the stock.

“Do not save what is left after spending, but spend what is left after saving.”

– Warren Buffett

No doubt Jack Bogle will agree that there are two more overlooked secrets to investment success. These are perhaps the most difficult to achieve, so maybe they are not overlooked but purposely ignored. You have to live below your means and save! Jack has pointed these out as have the other great investors. Both go hand in hand and are most effective if done when one is young because that is when compounding has time to do its magic.

Furthermore, an investor can more easily recover (mentally and financially) when they are young and less money is at risk. Yet these things are hard to do! It seems that, overnight, investors go from young and able to take risk but with no money, to some money but too old to take risk. When investors spend too much, start late and don’t save enough, they are forced to play “catch up” by taking more risk than otherwise might have been necessary. This leads to “speculating,” which invariably ends poorly, and then they blame the stock market!

Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”

– Ayn Rand

In summary, there are many facets to investment success and return is certainly one of them. Thus, almost everyone loves a bull market (unless you are a pessimist and have been shorting stocks or sold over election concerns). Yet bull markets often result in adopting bad investment habits, getting complacent, or worst of all, believing investing is easy so there is no need to pay for help. Remember, the more bullish the market becomes, the more cautious an investor should become. Thus paying someone to help you control your emotion can be a worthwhile expense if you have trouble doing so yourself. A bull market (not a bear market) is the time to review and refine your Investment Process. Ask yourself: “Do I have an Investment Process (based on my Investment Philosophy) that guides my approach to investing? Is it one that I trust will give me patience and confidence to ‘stay the course’ when the investment seas get rough again?” Read “The Money Masters.” Find your Investment Philosophy and then create or adopt an Investment Process. Next, be aware of the cost of your investment, especially the cost of the “packaging.” As we say, if your plan comes in a binder, it is likely too complicated and costly. Last, and perhaps most important, ask yourself: “Am I living below my means and saving?” Investment planning is of little use without wholeheartedly committing to living below your means and saving. Investment failure is often as much a function of undisciplined spending and a lack of saving as cost or any other factor. Unfortunately, no one wants to be told they’re the problem. No amount of “research” will fix that.

“Learn every day, but especially from the experiences of others. It’s cheaper!”

– John Bogle

Thoughts for Investors is a quarterly newsletter written for clients since 1997 by this author. The purpose is two-fold. First, it is meant to help explain the investment philosophy that guides the author’s approach to portfolio management. Second, it is meant to remind readers of important behavioral skills that the author believes are necessary to help them become successful investors. The author welcomes comments and criticisms, especially if they can be shared for the betterment of all investors. Quotation is permitted with full attribution.