#11 The Investor Mindset 🧠💷
The importance of keeping a clear head when everyone around you is losing their sh*t.
I know what you’re thinking. It’s Saturday. This should have been in my inbox yesterday.
Unfortunately, life sometimes has a way of messing up your plans and as a result I wasn’t able to publish this on Friday. But hey, you’re probably not working, or sitting in traffic, or thinking about your important meeting. So you might be able to take the time to read this one at a leisurely pace 😉
Which is just as well, because we’re going to be looking at just how easily you can improve your investment returns, by doing almost nothing.
The Deciding Factor
You might think that to be a successful investor, you need to have 25 different computer screens, buy and sell stocks every other minute, and have caffeine flowing through your veins.
But there is actually something very different which is highly likely to be a better indicator of your investing success.
The good thing is that it has nothing to do with how intelligent you are, or how rich you are.
It’s not some voodoo ritual or even a course that you have to pay for.
I’m talking about your investor mindset.
In many ways it’s easier than ever to be an investor now. You don’t have to call up your stockbroker and pay him money to invest in shares for you, you can simply automate it from your bank account and technology will do the rest for you.
However, there has also been a huge rise in the amount of information and publicity regarding investing. Turn on your TV and you’ll find channels talking about stocks to watch this week, the internet is full of websites recommending one thing or another, and you even get beaten over the head with it on Twitter and Reddit (looking at you, diamond hands Gamestop shareholders!).
It’s a continual bombardment of information, to buy this, sell that, take money out to have cash for the drop etc.
As a result, you end up cutting in and out of the market, looking to buy when the price is low and sell when the price is high, and roll that money into your next investment.
Which sounds a lot more like trading, rather than investing…
Time in the Market vs Timing the Market
The problem with trying to time the market is that you’re much more likely to miss out on the best market days.
This graph demonstrates how much your returns are affected by missing out on just some of the best days in the market.
By missing just the 10 best days over 27 YEARS, your annual returns drop from about 7.7% to 4.7%.
If you invested £10k in 1995 and left it in the market with a 7.7% return, that would return you about £79k.
But if you missed the top 10 market days, your £10k investment would only end up being about £29k.
£50k difference, simply for missing the best 10 days.
And you know when the best market days are most likely to happen?
In bear markets and recessions, when people are panicking and selling their shares to get their money out.
Buy the Ticket, Take the Ride
The stock market has weathered the Great Depression, two World Wars, oil crises, terrorist attacks, several financial meltdowns and a global pandemic.
In each and every one of those moments, it would have been easy to think that this was it, the market was never going to recover from the damage.
Yet take a look back over the history of any Index, and despite all of these massively impactful events, the trend is up and to the right.
When we invest, we are investing for the long term.
So why do you worry about the short term effects of situations beyond your control?
Knowing the effect of missing the best days in the stock market, the smart investor keeps his cool and stays invested.
Because although he doesn’t know when the better days are coming, he wants to be sure that he’s invested when they happen.
Seeing the Opportunity
They say that most of the wealth is made during bear markets.
”That’s ridiculous!” you might think. “How can people be making money when the price of everything is going down"?”
The problem is that you’re looking at it from the wrong perspective…
When our favourite shops have a sale, do you suddenly sell everything of theirs that you own, worried about how the sale will affect the value of the things you already own?
Of course not.
You’re happy because it means that you can get more of the things you like at cheaper prices than usual.
The problem with market declines is that we actually have the value of the things that we have bought on a screen in front of us. Very clear numbers which show if we’re winning or losing.
And when they turn red, we suddenly start panicking.
We see the value of what we have bought dropping and take action to sell our shares, before the price drops even further. “Phew, that was close! Good job I only lost 10%!”
The intelligent investor is waiting for moments like this, because everyone starts selling their shares at reduced prices. They buy up shares in the biggest sale of the year, and then sit back and wait for the market to recover.
Because as we saw earlier, most of the best days happen in bear markets. And you just confirmed your losses by selling, when you could have bought more at a 10-20% discount and then simply held onto them.
As we can see, your investor mindset makes a massive difference.
Not trying buy and sell at the right time, but patiently staying invested in the market.
Not getting caught up in scaremongering and “Panic, sell now!” messages from the media.
Realising that these moments are in fact the best time to pick up investments at discounted prices.
When in doubt, zoom out.
And when everyone else is losing their heads, keep your cool and stick to your plan.
See you all next week!
Felix
PS Let me know if you have any preference whether this goes out on Friday or Saturday, I could always make it a permanent change!