The market has awoken lately, and expertsare again out in droves debating whetherthis is the summer rally, the beginning ofthe next bull market, or just another rally in anongoing bear market. These debates are goodentertainment, but they're not going to help youmuch in becoming a successful long-terminvestor, nor will they ensure thatyou can afford that wonderful retirementyou've been dreaming about.
FACTORING YOUR SUCCESS
If you ask the real experts (ie, thosewho base their opinions on sane analysisof data and not on Wall Street myths)which factors are likely to contributemost to your long-term investment success,most will list your behavior at ornear the top of the list. Yes, your ownbehavior will help or hurt you more thananything else as a physician-investor.
That may surprise, or even shockyou. How could behavior be so important?Isn't knowledge of investing muchmore important? Isn't knowing how topick the right stocks and how to buy andsell them at the right time more important than thispsychological jazz? Isn't proper asset allocation andportfolio adjustment over the years a key factor?After all, we know how to behave, don't we?
COUNTING ON KNOWLEDGE
Let's start with investment knowledge. Yes, youmust know how to invest. You have to know somethingabout the differences in the risk characteristicsof stocks and bonds, about asset allocation,etc. But, you also need to realize 2 things.
First, there's nothing you can do about the markets.You can't make the stock market go up ordown. You can't adjust interest rates. You can't forcereal estate prices to soar or sink. You're going to earnon your investments exactly what the market givesyou. Even if it were possible to acquire the knowledgeof how to pick stocks or time themarket, it isn't necessary, despite claimsWall Street analysts make to the contrary.
Not that this information wouldn'tbe helpful, but such knowledge, if itexisted at all, would not be available tomere mortals. What you need to knowis why and how to diversify, how todesign the right portfolio for yourself,and a few more things along thoselines. You can acquire the necessaryknowledge with relative ease, comparedwith changing your behavior.
Second, you can recruit help inobtaining investment knowledge. If youdon't have the time, interest, and aptitudeto acquire the investment knowledgenecessary for success, hire a financialadvisor to apply that knowledge onyour behalf. I admit that finding theright financial advisor at the right price is a majorchallenge. But with some effort, you should beable to locate a good match.
Your behavior is a different story altogether. Youcan't hire someone to behave the right way for you.We're all stuck with ourselves in that matter, knowinghow difficult it is to change habits and behavior.Let me explain what I mean with an example frommy favorite investment sage, Warren Buffett.
As he puts it, we all love to buy things on sale.We look for sales and are willing to buy morehamburgers, clothes, or whatever when theprices go down, and we certainly cut back onbuying these things when prices go up. That'srational behavior, and we generally behave rationally,except when it comes to investing.
When we put on our investor hats, we suddenlyturn our behavior upside down. We becomemore and more eager to chase a stock or throwmore and more money into the market as the stockor the market goes up. And when they go down,we don't want any part of them; we abandon themin droves. Buffett goes a step further, raising thequestion: If you're a long-term investor, shouldn'tyou be praying for the market to go down in theshort term, so you can buy stocks cheap, ratherthan praying for the market to go up?
The point he makes is clear. Most investorssimply don't behave rationally. They can't evenrecognize that they're not behaving rationally.Even if they hire the right knowledge, they oftenhurt themselves by undoing the good that thehired help tries to do them.
Let's look at another example. When the marketis on its way up and everyone's excited aboutit, most investors jump in and take a lot morerisk than they can handle. When the marketinevitably goes down, they get burned and cutback their risk exposure, sharply reducing theirchances of recovering losses or making money inthe future. That's not rational behavior.
So the next time you're wondering how toimprove your chances of becoming a successfullong-term investor, remember that the rightbehavior as an investor is the key. Compared tothat, everything else is easy.
author of The Only
Proven Road to Investment
Wiley; 2002), currently
teaches finance at the
Graduate School of
Business and consults
with individuals on
financial planning and
questions or comments