I write about the psychology of investing a lot.
That's because I think it's the area of investing most likely to help you succeed – and most likely to be responsible for failure.
Sure, it's possible that you get your analysis wrong on a given company, or even a whole sector.
But that error is unlikely to cost you all that much, in the overall scheme of things… if you get the psychology of investing right.
See, the basics are straightforward:
– Diversify.
– Invest small amounts, regularly
– Don't speculate
– Don't overtrade
We can add more, of course, but that's the basics.
And, if you've done those things, the occasional temporary loss – or permanent mistake – on a given company just isn't going to hurt you that much.
How do I know?
Because I own Kogan.com Ltd (ASX: KGN) shares.
Those shares are down 12% today, at the time of writing.
Yep, it sucks.
The good news is that I've taken my own advice on those rules, above.
I own shares in more than 20 companies and ETFs
I invest when I have enough saved to make the brokerage cost small enough to bear (under 2%, and ideally under 1% of the trade value).
I own shares in businesses and ETFs whose long term opportunity I believe in, and whose share prices are reasonable.
I buy regularly (see above), but rarely sell.
The result?
Kogan's 12% fall (plus other increases and decreases) pushed my Australian portfolio down about 1.8% this morning. My US portfolio was down about 1.2% last night.
Is it welcome?
No.
Though, to be honest, if it wasn't already a sizeable portion of my portfolio, I'd probably be a buyer today. (Actually, The Motley Fool's trading rules don't let me trade a company two days either side of writing about it, so this very article would mean I wasn't allowed to, either, but you get my gist!)
Yep, a 12% fall stings.
So, how do I feel?
First, poorer.
No-one likes losing money.
But we've been here before.
We'll be here again.
The market fell 38% in a month and four days, around this time last year.
Falls are unwelcome, but, going back to my opening lines, you've just gotta make your peace with them.
I'm not perfect, and I've been doing this for a long time, but I've made my peace with share price falls.
Second, it makes me feel tentative.
"Have I made a mistake?"
"Am I wrong?"
These are very normal and reasonable questions to ask when your company's shares fall by a big margin.
And here's the uncomfortable reality:
I might be.
No, I don't think I am.
But – more importantly – I could be wrong about any single company in my portfolio.
Statistically speaking, I'm probably wrong about somewhere between 30%-40% of the companies I own.
That's why I'm diversified.
These are the rules of the game we're playing.
If you want perfection, you'd better make your peace with earning 0.05% interest on cash in the bank.
Or, if you want higher returns, you're going to have to accept volatility.
See, even the best-performing companies can be very volatile.
Speaking of e-commerce – and volatility – I also own Amazon.com Inc.
Those shares have suffered many, many large percentage falls on their journey to their current 1000-fold gains since listing.
Sometimes, it was on the back of unflattering results. Sometimes, just because the market changed its (collective) mind.
If you're going to invest, you need to expect these things.
Even Warren Buffett's Berkshire Hathaway (yep, I own shares of it, too) has fallen 50%, top-to-bottom, three times in its market-crushing history.
And – get this – Buffett was there the whole time.
Yet investors got such cold feet, even with the world's best investor at the helm, that shares more than halved.
Thrice.
As Kipling nicely put it
"And so hold on when there is nothing in you
Except the Will which says to them: 'Hold on!'"
I don't love days like today.
(Especially when I can't buy!)
But I'm used to them.
I expect them.
I've made my peace with them.
I refuse to let the market dictate my emotions or my actions.
I won't trade recklessly, out of fear, impatience, intolerance or unhappiness.
See, I'm not the smartest investor I know.
I'm not the most educated.
I'm not the nerdiest spreadsheet jockey.
I'm not the one with the best contacts.
But I have two key advantages:
I'm pretty good at pattern recognition (I tend to notice similarities between past successes and failures, and today's businesses).
And I have a very good hold over my emotions.
Remember, I was – and we at The Motley Fool were – telling you to buy when others were heading for the hills during the COVID crash.
Want the uncomfortable truth?
I have no idea if I'm right or wrong about Kogan.
… or any other company in my portfolio.
I have an informed opinion. More often than not, over the past almost-10 years running Motley Fool Share Advisor, I've been right.
And that 'right-ness' has delivered significant market out-performance for our members.
Yep, I've made mistakes.
We've lived through times when stocks like Kogan and Corporate Travel Management Ltd (ASX: CTD)(yep, another one I own) were hated by the market.
And as the legal eagles (rightly) insist I say, past performance is no guarantee.
I don't expect you to love market falls.
I don't expect you to even like them.
(Though don't forget, if you have money to invest, they can be wonderful opportunities!)
But what I do need you to do is learn – with our help – to master your emotions.
I can't help you if you don't diversify.
I can't help you if you won't sit quietly, while the crowd outside is telling you to trade.
I can't help you if you are going to freak out and sell when the going gets tough.
I can't help you if you expect perfection.
And I can't help you if you're expecting returns in a week, a month, or even a year.
But I think I can help you – we can help you – if you're prepared to invest the way we do.
Patiently.
Carefully.
Confidently.
Thoughtfully.
(Notice I didn't say 'smartly'? You don't need a stratospheric IQ to invest. In fact, those who missed the April 2020 share market rally were disproportionately the 'smarties'.)
If you learn to control your emotions, you'll be better off than maybe 75% of investors. Perhaps more.
As Buffett said:
If you've got 160 IQ, sell 30 points to somebody else because you won't need it in investing. What you do need is the right temperament. You need to be able to detach yourself from the views of others or the opinions of others.
You need to be able to look at the facts about a business, about an industry, and evaluate a business unaffected by what other people think. That is very difficult for most people.
Most people have, sometimes, a herd mentality which can, under certain circumstances, develop into delusional behaviour.
Oh sure, you can invest like that random bloke on that internet forum tells you to.
But we're going to do our best to invest like Buffett.
I'm sure you can tell which approach we hope you'll follow.
Fool on!
