People view investment success as ultimately about what return you can generate over a period of time. While I don’t disagree with this benchmark, how you get there and the peace of mind that you have with your investments is equally important in keeping your sanity over a long period of time. It’s not only about how much money you make, but doing so in a way that minimizes your stress and worry that makes someone a contented investor in my view. In any case, I think there are a few key things you need to cover to get on the path to investment happiness.
Know your risk tolerance
Having a view of what you can stomach in terms of movements in your capital value can be very important. If you can’t tolerate large volatility the stock market may not be the right place for you, because declines in market value can mean that you sell out at precisely the wrong time (when markets are at their lowest points).
In that context an investment in fixed income securities like bonds, while providing a lower return, may be better for you over the long run. Investment in individual stocks also comes with a potential total loss of capital, so if that’s something that you obsess about then holding an index fund (which is simply a basket of stocks that track an index like the Dow Jones for instance) may be better.
Having a lower risk tolerance may also mean that you are better off by avoiding things like investment loans and buying stocks on margin. Buying on margin can boost your return on equity, but also has substantial risk as well.
Understand what you invest in
If you understand how the business that you are invested in works, and how it makes money then its highly likely that you can pinpoint the growth drivers that will continue to help that business make money. In the case of a company like Coca-Cola (KO) for instance its pretty easy to understand that selling more cans of Coke will help Coca-Cola be make more money. The drivers behind what will help something like Chicago Mercantile Exchange (CME) generate revenue are a little less obvious to understand.
Understanding the business that you have invested in will also make you a little less panicky when there are large swings in the share price, as you should be able to understand the drivers of the business and work out if there are material changes in the business that are taking place.
Research & Monitoring
Doing some basic homework on your investments and trends affecting your investments is a very important part of feeling secure in what you own. In my view this holds true for whether its an individual stock that you are looking at or even an index fund. Individual stocks can be affected by a number of factors that can influence their individual performance including new competitors, or new trends in the market. Carefully monitoring your investments can save you significant losses over time.
Index funds are often weighted by market capitalization, so the performance of an index fund is likely to be heavily weighted toward the higher capitalized companies in a given index. If you don’t have a positive view on these companies, it could be worth your while reconsidering whether you want to be in that particular index fund.
Unless you happen to be an extremely skilled trader that can profit from short term movements, its likely that any strategy you implement will take some time to see results. Having the patience for those results to emerge without continually chopping and changing is crucial to success. I view investing in stocks as similar to investing in a business. You typically don’t sell a business in 1 or 2 months if you don’t see a dramatic increase in performance. It takes time to see sustained performance and improvements in valuation. Having patience with your investments will allow the power of compounding to come through over a long period of time.
Courage to Seize opportunities
I’m always loved Warren Buffet’s saying “buying a $1 for $0.50″. Its much harder to put this into practice though. This involves moving into a stock when everyone else is abandoning it, or when markets are tumbling.
Some of my best purchases historically occurred during the depths of 2009. I picked up American Express (AXP) at $15.00 when it was on a yield of almost 5% and Caterpillar (CAT) at $31. I exited both of those stocks later in 2010 for multiples of what i paid for them. This even holds true for investments in index funds. Buying additional units at low points and not selling when markets crash can be financially rewarding over the long term. While you don’t need to seize bargain investments to be contented, doing so will certainly boost your investment returns!
Getting into a stock when everyone else is running away from it can be extremely lucrative if you have done the research. I recently started positions in Western Union (WU) and Quality Systems (QSII) in the belief that these represent bargains worth considering. Time will tell if this was correct or not.
Conviction & Self belief
In my mind this is probably the most important to being happy as an investor. No investment philosophy or strategy in the world is going to be successful for you if you don’t believe that it is correct. The slightest fall in stock price can send you scurrying for the exit door even though there may be no legitimate reason for that to happen. It could just be Mr Market, having a bad day. More than anything, self belief in a strategy is what will help give you peace of mind over a long period of time.
For me, that conviction comes from getting an income from a stock. Because my focus is on the income that stock delivers rather than the price for which it trades, I’m not bothered so much about price of the stock. If the stocks dividend looks like it may be affected, then I’ll certainly reconsider my position, but until then, I’m happy to stay put.
What do you think makes a contented investor?