07 Apr Putting the ‘I’ back into Investing
Alvin was invited to speak a couple of weekends ago. Over two sessions at the SGX Auditorium, he shared with the audience his own investing journey and many common mistakes investors tend to make as they seek profits from the market. Of course, no session is complete without introducing the Permanent Portfolio. The crowd was definitely interested judging from the questions they threw up during and after the session.
There was a particular question that struck me as being important enough to share. Towards the end of the session, a member of the audience asked Alvin if he builds and maintains his own permanent portfolio. Alvin said no, he does not, and that prompted the gentleman to probe further. Why not, he asked, since he is promoting PP as such a low risk, low cost, low volatility and low effort solution for retail investors, why is he not invested himself?
The answer is simple, Alvin said. Permanent Portfolio is the ultimate investing tool for the Passive retail investor. Someone who would rather occupy his or her time with the other leisure pursuits rather than tracking the market every day, but yet discerning enough to know that money in the fixed deposit account will not compound fast enough to beat inflation. Or perhaps someone who would rather spend his time perfecting the skills required to advance in his profession and career but yet understand the importance of making his money work hard as well.
For Alvin himself, he spends an inordinate amount of time gathering information and studying the financial markets. That is his passion. He is a retail investor, but definitely not passive. If he were to put his money into PP, it would be undermining his effort and his tolerance for risk and volatility. Even though the potency and joy Viagra bought to mankind is undisputed, it does not mean every man in the street should start popping the little blue pill. That is exactly the same with PP – it is brilliant but it is not for everyone.
The question was meaningful because it highlighted the common approach many people adopt in their investing journey. The average investor takes an outside-in approach. Many investors look at the potential profits and returns available to them via the various structured financial products and decide which ones to go for. There are also others who DIY and opt to manage their own money through actively trading and investing. Many started trading because their friends, colleagues and family members do, and they get recommended a particular stock, method of trading or a financial instrument like forex or options in this manner.
And there are so many different trading and investing methods for the investor to choose from. Fundamental analysis, value investing, technical analysis, trend following, trading momentum, contrarian, statistical arbitrage, each with their own pros and cons to live with and overcome. How then does someone decide what is suitable for themselves? Unfortunately for most people, this question seldom cross their mind. We often get seduced by the first and most easily available investing strategy that comes to our attention that we throw all caution out of the window and dive deep in.
For one to be successful in the financial markets, it is essential that one reverses the normal process and adopt an inside-out approach to investing and trading. Investing is a personal sport. Just like it is tough for someone of average height to become a world class basketball player, it is difficult for a person of average effort to become a world class investor. Just like it is tough for someone with boundless energy and a short attention span to be a good chess player, it is also difficult for an impatient person to successfully practice value investing or a risk adverse one to trade highly leveraged products profitably.
As individuals we bring to the market our own different values and purposes. We have different biases and beliefs, shaped by our previous experiences in life. We have our own unique skills sets, our own strengths and weaknesses. Each of us is suited to participate in the market in different ways.
So before you embark on the next investment project or decide if you should continue with your current one, take some time out to ask yourself. Do I have the time for the form of investing that I am going to do? Am I willing to put in the effort required to make it work? Do I have the discipline to see it through? Do I have the stomach for the losses? Am I compatible with the method I choose? Is it what I believe in? Will I be able to leverage on my strengths? Will my weaknesses by exploited if I choose to invest this way?
Only when you understand who you are and what you stand for (and more importantly who you are not and what you do not stand for!), will you be able to find a method that suits you.
So find yourself, and put the ‘I’ back into Investing!