Portfolio Copycats Anonymous
In times like these, the most important lessons are those we have built over the years. The basis for this is our own beliefs in the market we have grown up in.
Over the years, I have come to understand that the most difficult aspect of maintaining an investment style is how our own risk and savings profile changes. A teenager faces financial risk differently than a senior citizen. The availability of surplus funds in youth is not the same as in retirement. So, how can we maintain a consistent investment style over the years? Or is it important to have a single belief on which to build our investments?
When markets are stressed, as in these days of uncertainty, a core set of personal beliefs will emerge that tests our previous beliefs and may change if needed. We may never recover losses already caused by a poor portfolio, but paying attention to a changing world will help each person reflect and reach conclusions about their investment future.
Active investment versus passive investment:
Active investing is the most difficult way to create wealth in stocks. At the end of the day, simple math often shows that our activities have not created wealth compared to other market activities. Moving from one investment to another, making a profit and redeploying it, is more like football than chess, with constant movement and uncertainty about immediate results. For everyone, the goal is to score and win. But the intermediate stages, especially the redeployment of profit and capital into new areas, are often beyond the investor's control or knowledge.
Master investment gurus had distinct styles, luck and resources for success. Jim Simons and Buffett were two whose methods were totally different. We may try to imitate them, but only with limited success. Every squirrel will get an acorn once in a while. But he will never be able to derive a lesson from it for a lifetime of living.
Passive investment looks easier and less stressful. But here too, luck, the amount of capital invested, and time play an important part. Many think passive investing is just buy-and-forget. Yet over time, those who believe they have found something of permanent value often find issues to address.
Adding the market's prevailing wisdom to our portfolio requires little research. Simply following the market index and investing in it is a brilliant way to achieve this. Of all the inventions in the world of investments, investing in market index stands : easy, cheap and effective.
Having one's own investment philosophy is a complete vehicle that must guide our strategy. Without a strong philosophy, we cannot see a strategy, especially in times like these. Applying a screen to filter companies with low earnings ratios and long-term growth potential is one way to evaluate picks. But we get distracted by all the noise the market makes in new areas: drones, AI, guns, solar, startups, and more.
At the end of the day, proof of the pudding is in eating. If our investments deliver returns that exceed or at least match the market benchmark, then it is working. Otherwise, it is not. Remember, it only takes an umbrella and a short walk to your nearest bank on a rainy day to put all your capital into a fixed deposit for a fixed return. That too is an investment.
FINE
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