It is all too easy to get caught up in the daily movements of the share market. One day it is up, the next it is down and so too are your emotions – and as a share market investor your emotions can be your undoing. Unfortunately it may not just be your portfolio that suffers either, when share market investing if we don’t wisely manage how we invest we can loose everything – from our sleep at night to the shirt right off our back. After investing in and studying the markets for over 12 years or so now I am very comfortable with it. That doesn’t mean I know what is going on all the time or even half of the time, all it means is that I continue to invest and I don’t loose any sleep over it. Here’s how I manage my portfolio and my emotions.
Practice like a Monk
For the purposes of this article I use the term ‘Zen’ in it’s slang definition – ‘Feeling peaceful and relaxed.’
Do the work
What has Monks making Sand Mandalas got to do with investing? Almost everything if you are a value investor. Many investors both new and ‘experienced’ just can’t help themselves but get caught up in the daily action of the markets. I love this kind of enthusiasm, but I also believe chasing numbers on a board or lines on a chart can be a very distractive and hazardous habit. Instead be like the Monks – focus on the work (research), commit to your work (invest) and then… let it go. Getting all worked up everyday over the latest share price direction or ‘charting trend’ isn’t going to changing anything accept your quality of sleep. This is the trick – focus more on the work and less on what happens day to day once you make an investment.
Your focus is one of the hardest things in the world to manage. One minute you are hard at work and the next, ‘Oh, look it’s a squirrel.’ Focus is a human trait that we still don’t fully understand and it is ridiculously powerful – both meditation and hypnotism are forms of deep focus.
As an investor there are two focus points that I believe make all the difference to your portfolio. We’ve already discussed the first one, focusing on doing the work. The second one is focusing on what you understand.
Focusing on what you understand is a practice in working your strengths and avoiding your weaknesses. There are over 45,000 listed companies on stock exchanges all around the world, that is an overwhelming number of companies to try and understand. If you believe you can understand them all, power to you – but personally, I’m going to keep on keeping it simple.I stick to researching products and service that I can understand, made by companies that I can understand, in industries that I can understand, in markets that I can understand. Don’t get me wrong, I’m always reading, studying and aiming to broaden my knowledge and understanding, but if I’m not comfortable with my current level of understanding – I simply don’t invest.
The Secret to a Deep Sleep – Buy Cheap
Value Investors call this ‘a margin of safety.’ When you break this down into dollar terms this essentially means buying a dollar for say 70 or even 50 cents. You see, I believe that what a company is trading for on a stock market at any given time doesn’t necessarily mean that is what the underlying company is actually worth. Here’s an example:Quite a few years ago now I found a listed Gold Miner trading at slightly less than it had in cash in the bank. In other words, (if it worked this way) you could have bought your shares, walk into the company and said ‘I want out,’ grabbed your share of cash out of the vault and have made an instant profit. Now this discount to cash in the bank in itself isn’t enough to get me interested to invest, as companies have an uncanny knack to chew through cash, but it did get me looking further. Long story short, the miner not only had a big wad of cash in the bank and no debt, it also had a lease on a proven ore deposit and had nearly finished construction on their mine and processing plant. But because gold was tanking at the time the market wasn’t interested in a non-productive gold mine – even though in 6 months it would be productive. So, I ran the numbers, took off a discount to allow for any errors and assumptions in my research bought in and continued to sleep really well (as I knew I’d bought a solid asset at a large discount). Then I just waited for the market to catch on to this discrepancy – 10 months later the investment had more than doubled.
Patience is a hard virtue to get on top of. Personally, in many facets of my life this one has brought me unstuck and taught me a lesson more than once. If you want a solid incentive to help you practice patience, investing is a good one.
Often during a bull market as a value investor you will be searching and searching for undervalued investments and to no avail. This is when your patience is really tested. It is hard to continually keep doing all the work without getting any of the action. But you have to hold tight and remind yourself to stick to your rules, be patient and know that it will all pay off when the market turns or you do find that one undervalued gem.
One of my filters for proceeding with an investment is, ‘Do I believe it has the potential to double within 2-3 years?’ This doesn’t ever mean it necessarily will, but it does make me ensure I am buying an investment cheap enough to provide that kind of potential return.
Often I will be watching a company on my Watchlist or researching a new company and it will not quite be low enough to make my ‘buy-in price.’ This can be oh-so frustrating and a good test of will power and conviction to your rules. I have missed out on purchasing great investments in the past from this, but I have also found that once you start breaking or simply relaxing your rules this is when you start to slip-up.
Getting in over your head
Which brings me to debt. Debt can definitely help to increase and compound your returns (I will talk about my experiences with debt and how I continue to use debt in a future post), but it can also completely destroy your portfolio and possibly all of the rest of your savings. If you ever find yourself ‘in a rush to get rich’ and start gearing up your borrowings faster and faster, it is probably a good time to step back and check yourself – preferably before it is too late.
I believe that to be a decent share market investor 20% of it is research and 80% of it is building the psychological strength to stick to your research and valuation rules – it is a funny ol’ game. There are no short cuts. If you do try and take short cuts time will eventually catch you out and teach you the lessons you are trying to rush past – just like a good Zen Master. So I continue to try and learn from the patient and persistent monks, keep myself in check and stick to my rules with each and every investment.
Enjoy the ride!