Sports can be exciting. Travel can be exciting. Movies can be exciting. But your investing should be boring.
Why? Because proper investing mechanics are driven by investing systems that generate predictable outcomes. And when outcomes become predictable, the excitement is lost. While investing with a system may be boring, it can also be immensely profitable when applied with regularity.
If you want to become an accomplished investor, it behooves you to understand that emotion should NOT be part of your approach. Making money through investing is an intellectual pursuit, not an emotional pursuit.
One of the challenges I occasionally face with investment coaching clients is that they have a subtle “adrenaline addiction” and they’re always seeking excitement. Well that’s fine, but it’s in your best interest not to be seeking excitement when it comes to your finances.
Investing – when done correctly – should be boring.
Learn to keep yourself in check. Once you start getting excited, it’s time to step away for a moment. Your emotions are surfacing and you risk negating your intellect. Take a break and remove the emotion so you can regain your composure and your competitive edge.
“If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” — George Soros, billionaire investor
George is absolutely right. Good investing is boring. Follow a plan.
Investing novices often find themselves chasing news headlines and acting on “tips” from financial pundits that are on TV. They jump in and out of stocks or other asset classes hoping to capitalize on some big move.
It’s been my experience that you don’t accumulate sustainable wealth by chasing news headlines and rallies. Rather, you accumulate sustainable wealth by having a solid investment game plan and sticking to it. That’s the approach that’s worked for me, and that’s the approach that’s worked for a lot of the successful investors I’ve studied over the years. These folks are not thrill-seekers when it comes to their finances; they’re very methodical and consistent.
PRICE CHARTS: VISUAL DEPICTIONS OF HUMAN EMOTION
Have a look at this chart. Not very boring, huh? Can you see the emotion? Buyers were stepping in and just bidding the stock price higher and higher even though the fundamentals of the underlying business didn’t justify its excessive valuation (at the time). That’s when you know there’s trouble brewing. And check out the violent exit once the panic set in. This is NOT sensible investing. What you’re witnessing here is a herd mentality where people bought into the hype and excitement and didn’t want to miss out on “easy money”. This was pure momentum and physics in action. Well, history has shown us repeatedly that those that buy late into an irrational rally end up paying dearly once logic and reason re-emerge. All of the dramatic activity and price fluctuations you see in this chart was driven by extreme emotion, not common sense.
By the way, any guesses on what this chart represents? This was the stock of Netflix (ticker: NFLX) in late 2011. Its price went from the mid-60s, all the way up to 297, and then back down to the 60s all within the span of less than two years. Talk about a roller coaster!
These patterns are predictable and they’re seen repeatedly in various price charts. Market tops tend to come after markets rally long enough to get everyone optimistic and euphoric again. Then, once the folks on the sidelines that sat out the rally in disbelief finally become the last buyers to deploy capital because they’re in fear of “missing out” on any more gains, that’s when the wind usually changes. Buying pressure starts to decline, the sellers are fearful of losing their profits, and they begin selling their positions. The late buyers don’t want to be wrong, so they sit back and stomach the precipitous plunge hoping they’ll be right and the price will turn back up. At a certain point, panic overtakes the market and a flurry of sell orders overpower any remaining buyers, which drives down the asset price even further. It’s all emotion… and that’s the problem. To me, that’s NOT investing; that’s gambling.
What often occurs in scenarios like this is after the asset price collapses, that’s when the “smart money” enters back in and acquires portfolio holdings at a fraction of their true value. They have a system – a boring, proven, reliable system – that’s incredibly effective at generating favorable, long-term investment profits.
Investing is a game of skill and intellect, not luck and emotion. I’ll say it again: investing should be boring because you follow a system. It’s a calculated, strategic approach to making money with money. Doing it well means being able to disregard the biochemical storm that’s raging between your ears (emotion) and simply following a proven plan.
Personally, I don’t really worry if the markets move higher or lower on a day-to-day basis. If they move higher, the positions and holdings I have will continue to provide investment income. And if they move lower, the positions and holdings I have will continue to provide investment income (and possibly give me an opportunity to accumulate more). In reviewing my portfolio activity over the years, it’s evident that I’ll typically only exit a position or jettison a holding if the fundamentals change. Other than that, I’m happy to sit back and collect the cash flow provided by the productive assets that I own. The approach is simple, boring, and immensely effective.
Hype, greed, fear, panic… irrational exuberance. As an investor, these are your enemies. Your mind has the potential to be the greatest soap opera scriptwriter in history. Don’t let your emotions impact your investing. Remember: good investing should be boring, and that’s what makes it so lucrative.
Those are my thoughts. Feel free to share some of yours below. Thanks for reading and as always, make it a great day.
MORE POPULAR CONTENT: