Personal strengths and values that help me get by in life seem to work against me in the world of investing.
An optimistic outlook serves me well in life but as an investor, I think it’s best to be pessimistic when selecting shares.
It’s easy to focus on upside potential. However, a firm grasp of the potential for things to go wrong in a business, or not as well as expected, helps me to allow a good margin of safety in the price when settling on a valuation I’m happy to pay.
Loyal relationships can yield good outcomes in life, but not always when they’re with my shareholdings.
If a company starts to disappoint, or if something happens to undermine the investment rationale behind one of my holdings, it can pay to be disloyal and sell up. I’m in favour of running my winners, but when the winning stops, so does the relationship.
I like to be proactive with that stance, looking for an opportunity to break up with a share from the first day of my involvement with it. I hope that things will go well and I’ll hold a company for a long time. But if they don’t, I’m off.
In life, keeping faith in others, ambitions and outcomes works well, but with investments, it’s different.
It’s folly to have faith that a company’s management can turn a fallen business around or that lossmaking ‘jam tomorrow’ companies can one day be profitable. If the financial numbers don’t show the progress I hope for, it might be time to ditch my hopes along with the company’s shares.
I often try to control things in life because it makes me feel secure, on top of things, and safe from nasty surprises. However, like all stock market investors, I have little control over what happens within the companies behind my shares. The potential for nasty surprises is big, despite all the research and analysis I might have done to try to control the risk.
To offset this lack of control I try to be more reactive to the random circumstances of luck that affect my portfolio. The only control we realistically have as investors is the ability to buy, sell, or hold. That’s a form of control I attempt to use well and in a timely manner.
Although an admirable trait in life, persistence can let me down in the world of investing.
Once I’ve done all the hard work analysing and researching a business behind a share, it’s tempting to stick with it, otherwise all that work is ‘wasted’. However, persisting like that can lead to investing disasters when a firm derails.
It’s better to be light on my feet with investments and to sell up if the longer-term outlook changes for the worse, or to take profits by selling at least some of my holding to mitigate the risk of reversal.