As many of you know, I have preached for years the importance of having a rules-based system when it comes to investing. It can be simple or complicated, but EVERY successful investor I have ever known has had a system. Warren Buffet has a system. William O’Neil has a system. The quant traders at Goldman Sachs have a system. While a system does not guarantee success, a lack of one does guarantee failure. Why is this? Because as I see it, the biggest threat to each of our investing success is ourselves. It is our own emotions and psychology which torpedo the best of plans. Markets move around (sometimes a lot), and we are constantly being bombarded with so called “important information,” which addresses this movement and even suggests what may happen next! All this movement and information plays on some of our basic emotions – namely, fear and greed. We begin to question our plan. Does it still make sense? Should we sell now and avoid future losses? Should we buy more? Is Congress going to dramatically change the tax landscape and wipe out my portfolio? Is the world going to be forever changed by COVID? What is the “smart money” doing? You get my point. We become unsure of ourselves either as a result of market movement or the information being spoon fed to us by all sorts of media and sales organizations.
When we become unsure, we can make mistakes and it is these mistakes that can result in losses. If the losses are frequent enough or big enough, they lead to people giving up, which is the biggest mistake of all. I have been on this planet for half a century and have lived and experienced my fair share during each of those years. It is my firm belief that investing is the only true equal opportunity endeavor in this world. The market does not care if you are big or small, white or black, rich or poor, educated or uneducated, connected or unconnected. Everybody gets the same fair shot all the way along. Everybody gets to participate to the same relative degree in the magic of compounding (Einstein called it the eighth wonder of the world) and the prospect of financial freedom, which I believe is real freedom.
The past several weeks I have been watching the internal rotation of various sectors within the market. I have been looking under the hood, watching the bond market as yields have continued to drop in the face of explosive earnings. I have been frustrated and scared as COVID has again reemerged in the form of the Delta variant to threaten my life and the lives of my family members. I have watched our Congress threaten to fundamentally change the opportunities for small business owners and entrepreneurs. And I have watched the broad market indices continue to go up and up. All this information and market movement has affected my thoughts and emotions. I begin to think about what should happen next. I begin to think about what I see that others do not see. I begin to listen to my advisor partners and other smart people. I begin to become unsure. I know earnings drive price but… this is the point at which mistakes are often made. Even by people like me who do this for a living in a very big way. It is at this point where having a rules-based system becomes critical. Everything in my being tells me this market should sell off and correct 10% or more. I have become unsure of the sustainability of the current bull run and am inclined to become defensive. I want to take profits and run. But I will not. I will follow the rules. I will follow the system because the system is not based on my gut or my fears or my predictions. It is objective, not subjective. It protects me from myself. It will not always be perfect or even right, it is not supposed to be. It will however take care of the biggest problem in all of investing, the man in the mirror.