The truth is that while luck, inside tips and intuition can be helpful, successful investing actually happens with other elements like logic, research, process and discipline.
1. Logic versus Emotions
Many successful experts in the investment business will tell you that success comes in your ability to remove emotions from the decision making process. While I believe this to be true, I also believe it is impossible to completely remove emotions from financial and investment decisions. However, success in investing does come from your ability to think with more logic and less emotion.
One of the best examples of this is when investors sell out their investments at the bottom of the market. Logically, when prices fall, it is the time to buy. You get more units for the same dollar. Yet over and over again, investors sell because of emotion over logic.
I’ve always believed that good research leads to good decisions. The trouble is, good research is sometimes hard to come by. Whatever the case may be, research never guarantees success because the investment industry is an imperfect one. However, good research does increase the likelihood that you will make better decisions about investing.
The principles of good research apply in everyday life. One of my good friends recently bought a new car. He read consumer magazines, went to different dealerships, and test-drove numerous cars. In the end, he had the peace of mind that the car he bought was the right choice. He could spout all the options, benefits and statistics of his new car and no one could dare to convince him that he made a bad choice.
Investing requires discipline. It is so easy to try to take shortcuts or get lured into get rich quick schemes. The fact is, the odds that fast moneymaking schemes work are really against you. Yet, every day investors are disappointed with lottery tickets, lousy investments and lack of discipline. The unfortunate truth is investment success is more likely to come slow and steady.
In the health and nutrition industry any expert will tell you that losing weight simply requires discipline. There are many variations to dieting and exercise but the bottom line is that success only results from staying disciplined to nutrition and exercise. The reason so many people gain back weight that they lose is that they lose the discipline to keep the plan going. Investing is no different!
Everything works better with a plan. You don’t have to have a plan to succeed but you certainly have better chances with a plan. The old saying goes, “if you don’t have a plan, any road will do.” Developing a plan is the first step to success. It will help you to think logically and rationally. Once you have the plan, it helps you to stay disciplined and keep on track.
Imagine driving from Edmonton to Vancouver for the first time. If you don’t have a map or a plan, you can still make it there. However, with a map, you are less likely to take the wrong turn or get off track. An investment plan will give you that same security and peace of mind, knowing when turns come ahead of time and what to do in case unexpected events occur.
Putting it all together
Put these four elements together and you will find the words of Warren Buffett:
“To invest successfully over a lifetime does not require a stratospheric I.Q., unusual business insight, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”
So in the end, if investing is about logic, research, discipline and process, then investing is more of a science than an art. There is no such thing as perfection in this industry. If that were the case, we would all own that one perfect investment. Simply try to remember these elements to investing and that success does not mean you will not make mistakes. Rather, success comes when you make more good decisions than bad ones, you make money more often than you lose money, and you are right more often than wrong.
Written by Jim Yih in Investing