Think about some of the most memorable people that you’ve ever met or known about. What was it about them that made you remember them?
In terms of famous people, it’s interesting how some of the most admired people now were made fun of by the majority, the “crowd”, while they were growing up or before they became famous. They were considered weird, different, or unusual because no matter how much pressure they faced from society and even from their own family members, they stuck to who they were and what they believed in. What they wore, what they did. Then one day, through a combination of many factors including the results of hard work, fate, and so forth, they were noticed by the masses and suddenly they weren’t so weird, different, or unusual any more. Think of the young Elvis Presley as a prime example.
Some of you might even have known somebody personally who just never fit the mould and frankly didn’t really care, whether or not they have actually become famous. What makes such people so memorable to me is because they’ve had not only the audacity to dare to be different, but to also ignore the crowd who makes fun of them along the way.
Actually, I’ve just described a key personality trait of a successful investor, that of being able to ignore the crowd. The “crowd” in this case is the vast majority of people who invest in the stock market through stocks, ETFs, and mutual funds and the people who tell them what to do, namely most investment advisors on T.V., radio, and in their neighborhood plus those selling their services online.
Even though there are some people who just seem to have been born with this trait, it is something that can be learned. The person so blessed can become the most successful of investors. To help you understand why plus to inspire you to learn how to ignore the crowd, here are three things that the crowd does versus what the successful investor does:
1) The crowd: tells you to ‘time the market’
The most famous advice along these lines is, ‘buy low, sell high’. Notice how the crowd tells you to do this when in actual reality few of them do it themselves. When the price of a company’s stock they’re following drops even if there’s nothing fundamentally wrong, they think there’s something wrong and so they don’t buy when it’s low. Then if it starts to reach new highs, they jump on board for fear of missing out after missing out on most of the biggest growth.
The crowd gets caught up in emotion because they live for the short term. As a result, they can’t stomach the bumps and dips that the stock market goes through every day. They get caught up in the waves of the short term because they haven’t determined to cross the ocean of the long term. So they think that investing is all about trying to ‘time the market’ and to predict when it’s right to buy and to sell. They get upset when they miss the lows and the highs by a few percent and don’t have the stomach to hold on long enough to let time smooth things out, which is the key to producing solid returns instead of losses or only mediocre returns.
1) The successful investor: buys at a reasonable price and holds on
The successful investor isn’t looking for the lowest price, he’s looking for the most opportune price. He’s looking for a great company whose stock price takes a dip for a reason that doesn’t involve the health or prospects of that company and buys then even if it isn’t a 52-week low or some other kind of “low”. He doesn’t care about the current price because he’s fixed on the future several years down the road. He doesn’t care about the waves of the short term because he’s set his co-ordinates to sail toward a port-of-call across the ocean of the long term.
He realizes from his research that the highest return on any form of investment is statistically proven to be through owning stocks of quality companies over a long time frame, the longer the better, and so the short term price of a stock doesn’t prevent him from buying because he’s confident that the price will be much higher in the long term.
As for when to sell, that’s only for when the money is really needed, whether due to emergency or other life circumstance, and so the money used to invest is that which isn’t needed for a long time instead of money that is need to feed himself and/or his family in the present.
2) The crowd: chases fads
The crowd is looking for the biggest return in the shortest amount of time, so they chase penny stocks or keep their ears perked for the fastest-rising stock(s) in the hottest industry. This is absolutely no different than if a person took thousands of dollars to a casino and dumped it all onto a table or into a machine that was running ‘hot’. In both cases, this is outright gambling, NOT investing. They don’t care about researching any of these companies or considering the factors behind the hot streak, they just want a fast return and hope get out at or near the top if they actually do find a fast riser. But the reality is, in both cases, money will almost always be lost and they will almost always end up with less than what they started.
2) The successful investor: looks for solid businesses
The successful investor doesn’t much care about how popular or ‘sexy’ a particular industry or company is. He prefers to invest in whatever he perceives will be performing steadily five, ten, twenty-plus years from now no matter how uninteresting it appears. Waste management. Chemical manufacturing. Utilities and infrastructure. Warehousing and logistics. Financial services. *yawn*
Sure, there are times when he might invest in a company that is the leader of a current trend, but it needs to be a trend that he perceives will last long into the future. Online retailers and payment processors. The Internet of Things.
In all cases, the company must not only be a leader but it must have a solid financial record, in other words not just hype but a whole lot of substance.
3) The crowd: is obsessed with the news
The crowd acts like a gunslinger with his finger hovering nervously over the trigger, ready to set it off and sell a stock at the first sign of any bad news, whether related to their stock holdings or not. And so they obsess: CNN, BNN, CNBC, and so forth, looking for the first chance to bail out before anybody else does. Some of them lose sleep. Others develop a chemical dependency to help them sleep or at least calm their nerves.
3) The successful investor: ignores the news
The successful investor keeps up only with relevant news, like that related to industry trends regarding the companies in which he is invested and interested, or any geopolitical news that might affect a specific investment. He realizes that there are times when he might need to sell in order to avoid a big loss, but he doesn’t get the jitters about the latest terrorist attack or rocket test-firing or political coup.
When he gets the jitters, he reminds himself about holding on by looking at a chart that he’s got tucked away in his drawer. It shows the value of the S&P 500 Index since World War II and how it is many times higher now than it was then despite several wars and recessions and terrible geopolitical events over that time period: Korea, Cuban Missile Crisis, Vietnam, Cold War, 1970s Oil Crisis, recessions of 2001 and 2008, and so on. He also reminds himself about how $1,000 invested in the S&P 500 Index in 1950 would be worth over $100,000 today.
He then tucks the chart away, logs off his computer, turns out the light, and has a peaceful sleep knowing that the events of that day and even that year will have no negative effect after ten-plus years on the overall value of his portfolio of several quality companies in which he holds stocks.