Everyone is different. We have our own different circumstances, risk appetites, temperaments, emotions, preferences, needs, priorities, and goals as well as different levels of understanding and experience in finance, investment, and money management. These influence our decision-making on our investments and personal finance. Hence, everyone invests and trades differently. What works for someone may not be preferred by another.
All great investors can have very different strategies and principles among them. At different points in market situations, they may have different views and strategies. Occasionally, there are mistakes (definitely) but in the long term, they get through and become successful in the long term. There are far too many important nuances in the field. Hence, in investing/trading, there are many ways to succeed, unlike most other professions.
Each of us needs to develop and define our own reasonable simple and consistent investment strategy that works well over time; one that we understand and believe in strongly enough that we will adhere to it faithfully through good times and bad.
I have no control over my returns I have full control over my investing process If I focus on my investing process, I’m confident that good returns will follow.Brian Feroldi
Know what you own, and know why you own it.Peter Lynch
A trading/investing strategy is all about answering these 6 questions:
- What to buy?
- What price to buy?
- How much to buy?
- What to sell?
- What price to sell?
- How much to sell?
Everyone has different answers to the above 6 questions even among the great investors. Everyone has their strategies. If we are unsure of our plan or follow others blindly, we will be confused lost and stressed especially when the market situation turns different from what we expect; unsure of what to do.
Everybody has a plan until they get punched in the mouth.Mike Tyson
Strategy is personal.
Personal finance is more personal than it is finance.Tim Maurer
Knowing yourself is the beginning of all wisdom.Aristotle
Our investing/trading strategy does not mean that it has to be the best, most profitable or the holy grail. Rather, it is one that suits us personally.
Academic finance, as explained by Morgan Housel, is devoted to finding mathematically optimal investment strategies. There are rational financial approaches to making money through formula and spreadsheet computations. Such rational academic approaches assume that we have no feel for roller coaster ride (i.e. volatility) that may result in temporary unrealized losses, especially on a longer time frame. We have feelings and may not be able to act rationally like robots that the calculation and approaches require us to be. We may simplify and adapt the approach to our preferences so long as it works comfortably and is reasonable for us to achieve our financial objectives.
As retail investors, we may start investing/trading with limited education, experience and knowledge compared to the professionals. We need to find our circle of competence and develop our edge.
The litmus test of our strategy: When the market is crashing, are we able to sleep well and feel okay? In addition, it should be an investing strategy that (a) we enjoy, (b) it is well-aligned with our lives and (c) able to generate good returns consistently over the long term. We also need to be comfortable with what we have missed – stocks that we did not buy or sell too early and they rally thereafter. We cannot win all the time, our strategy is unable to catch all the opportunities correctly, hence, we should not be greedy and be regretful.
It is difficult to follow/tailgate others (especially during volatile market conditions). Rather, it is more of learning from others and seeking to incorporate them into our strategy and our lifestyle than following others in blind faith.
The exhibit below is a simplified approach to categorize our approach(es): what type of stocks and preferred holding period. Other factors would be the types of industry, and the companies’ country of origin to focus. Each coordinate has a different mindset, preference and skills. It is good to focus and develop the necessary skills.
Focus and be ourselves
Where focus goes, energy goes.Tony Robbins
An investing/trading strategy allows us to focus and guide us, especially during corrections and bear markets. We also need to hone our skillset and keep improving – compound our skills, compound our returns.
We are constantly bombarded by news, commentaries and views from mainstream news, YouTube / Tik Tok videos, blogs and various social media commenting on the daily market actions and market-affecting events. We can easily lose our focus by getting excited with FOMO (fear of missing out) or be shaken with FUD (fear, uncertainty and doubt). We need to know what to know and focus on.
It is impossible to produce superior performance unless you do something different from the majority.Sir John Templeton
In investing/trading, there are many uncontrollable. What we can do is to control what we can: focus on our strategy and behaviours. We need to stay disciplined by sticking to our strategy through the different market conditions. We wait and bid our time to buy and sell as we follow our investing/trading strategy.
Michael Lipper, the president of an investment firm called Lipper Advisory Services, once remarked that Templeton, George Soros, and Warren Buffett shared one invaluable characteristic: “the willingness to be lonely, the willingness to take a position that others don’t think is too bright. They have an inner conviction that a lot of people do not have.”The book by William Green, Richer, Wiser, Happier
This is especially important when the market is not agreeing with us and there are fear and greed in the market. It means periods of waiting patiently and holding tight uneasily.
We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.Warren Buffett
Have conviction and be independent.
Keep it simple and useful; stay humble and don’t be a hubris
The simplicity that lies on the other side of complexity
Complexity can be a particularly seductive trap for clever people. Intelligent people are easily seduced by complexity while underestimating the importance of simple ideas that carry tremendous weight. (Richer, Wiser, Happier by William Green)
Buffett himself is a grandmaster of simplification. Writing to his shareholders in 1977, he laid out his four criteria for selecting any stock: “We want the business to be (1) one that we can understand, (2) with favourable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price.” These may not strike you as earth-shattering secrets. But it’s hard to beat this distillation of eternal truths about what makes a stock desirable. More than forty years have passed, yet Buffett’s four filters remain as relevant and useful as ever. (Richer, Wiser, Happier by William Green)
In our education and work, complexity tends to demonstrate our knowledge, experience and expertise. Many retail investors/traders would look for holy grails and try to “synergise” the strategies of various gurus. What we have can be a complicated messy strategy that we can get confused and lost during highly volatile periods.
Focus and simplicity…. once you get there, you can move mountains.Steve Jobs
Strong opinions, weakly (or loosely) held
It is an expression describing a framework developed by technology forecaster and Stanford University professor Paul Saffo. He described the process as:
“Allow your intuition to guide you to a conclusion, no matter how imperfect — this is the ‘strong opinion’ part. Then –and this is the ‘weakly held’ part– prove yourself wrong. Engage in creative doubt. Look for information that doesn’t fit or indicators that point in an entirely different direction. Eventually, your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result.”
It is a useful default perspective to adopt in the face of any issue fraught with high levels of uncertainty, whether one is venturing into a forecast or not. It is about the ability to embrace the power of definiteness and the power of openness concurrently. And when you act, you cannot be of two minds. You have to commit and proceed boldly. But to understand the world, you have to constantly learn, adapt, and grow, which implies shifting direction.
The illiterate of the 21st century will not be those who cannot read or write, but those who cannot learn, unlearn and relearn.Alvin Toffler
Knowledge is having the right answers. Intelligence is asking the right questions. Wisdom is knowing when to ask the right questions.
Marc Andreessen, the co-founder of Netscape and venture capital firm, Andreessen Horowitz, is often associated with the term. Being a venture capitalist, he is always looking for start-ups with great business ideas that opposed conventional wisdom. These can be very hard to execute and entrepreneurs must have strong convictions because of the very big bet of time or money or both. However, the world changes, how will they react?
There are always companies with innovative products and business models trying to create a new S curve and disrupt the incumbents.
Be open-minded and humble. Have conviction with flexibility. Be prepared to change and pivot.
Master inner game; steadying our emotions
Financial success requires two things: Mastering our mindset and perfecting our skills. A very important purpose of a well-defined strategy is to stay focused and keep emotions at bay.
Mastering the mindset has 2 key aspects: (1) what we have invested and (2) what we did not invest. We will not be able to invest in ALL the right stocks and the stocks we invested in will only go up. It is too easy to have emotional swings and commit many cognitive biases that affect our trades and performance. Especially during (huge) rallies and plunges, it is too easy to have our emotions sabotage us and make us act on impulse. A strategy aims to steady our emotions.
Keep validating our strategy and improving it: Compound our skills, compound our returns
How do we know we have the right investing/trading strategy? Have an investing journal if we are serious about investing and trading.
We can know how good our strategy is and how consistent we are applying the strategy as we track our transactions and performance. It allows us to experiment and examine our strategies through the quality of every decision made in different market conditions.
Start small to get it right. It is more important to validate the strategy than to start big with the intent to profit. Start small, fail small (and not get wrecked), iterate to get it right and slowly scale up.
Starting the investing journal has been my game changer. You can read in detail in my article: One thing I do that transforms my investment/trading journey.
Always work in progress and compound our skills
It takes time to develop the strategy, validate it across different and evolving market conditions and keep improving it. Our investing/trading strategy is always work-in-progress.
As we develop and improve our strategy, we realise we need to know how to manage our emotions, hone our focus, discipline and learn and act to think independently. We must also learn what not to do and what not to repeat (especially stupid) mistakes.
Great things are done by a series of small things brought together.Vincent Van Gogh
As we want to compound returns with our strategy, we need to develop and compound by strengthening our convictions and beliefs, managing our emotions and habits and reducing our silly mistakes. Slowly and steadily, as we improve our convictions, beliefs and habits and adjust our strategy, success will follow.
It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.Charlie Munger
It struck me that we should think small, not big, and adopt a philosophy of continuous improvement through the aggregation of marginal gains. Forget about perfection; focus on progression, and compound the improvements.Sir David Brailsford who coin the concept Aggregation of Marginal Gains
It takes dedication; keep learning and improving.