Best of the Week
Most Popular
1.Gold Price Trend Forecast, Where are the Gold Traders? - Bob_Loukas
2.Stocks Bear Market of 2017 Begins? Shorting the Dow At its Peak! - Nadeem_Walayat
3.Betting on President Trump Leaving Office Early, Presidency End Date - Betfair Market - Nadeem_Walayat
4.Why Stock Market Analysts Will be Wrong About 2017 - Clif_Droke
5.Is This The Best Way For Investors To Play The Electric Car Boom - OilPrice_Com
6.Silver Price 2017 Trend Forecast Update - Video - Nadeem_Walayat
7.Gold Price Set For Very Bullish 2017, Trend Forecast - Austin_Galt
8.10 Things I learned From Meetings With Trump’s Transition Team - - John_Mauldin
9.How Investors Can Profit From Trumps Military Ambitions - OilPrice_Com
10.Channel 4 War on 'Fake News', Forgets Own Alt Reality Propaganda Broadcasting - Nadeem_Walayat
Last 7 days
The Best Reasons to Buy Gold in the Age of Trump - 22nd Feb 17
Silver, The Return of Stagflation - 22nd Feb 17
Why EU BrExit Single Market Access Hard line is European Union Committing Suicide - 22nd Feb 17
Gold: Short End US Rates Matter More Than Long End Real Yields - 22nd Feb 17
CONTINENTAL RESOURCES: Example Of What Is Horribly Wrong With The U.S. Shale Oil Industry - 22nd Feb 17
Here’s Proof Rising Rates Are Good for Gold - 21st Feb 17
Gold and Silver Weekly Update - 21st Feb 17
US Dollar and Gold Battle of the Cycles - 21st Feb 17
NSA and CIA is the Enemy of the People - 21st Feb 17
Big Moves in the World Stock Markets - Big Bases - 21st Feb 17
Stock Market Uptrend Continues - 21st Feb 17
Brent Crude Oil Price Technical Update: Low Volatility Leads to High Volatility - 20th Feb 17
Trump’s Tax System Could Spark The Wave Of Self-Employment - 20th Feb 17
Here’s How to Stay Ahead of Machines and AI - 20th Feb 17
Warning Signs Of Instability In Russia - 20th Feb 17
Warning: This Energy Investment Could Wreak Havoc On Your Portfolio - 20th Feb 17
The Mother of All Financial Bubbles will be Unimaginably Destructive when it Bursts - 19th Feb 17
Gold’s Fundamentals Strengthen - 18th Feb 17
The Flynn Fiascom, the Trump Revolution Ends in a Whimper - 18th Feb 17
Not Nearly Enough Economic Growth To Keep Growing - 18th Feb 17
SPX Stocks Bull Market Continues to make New Highs - 18th Feb 17
China Disaster to Trigger Gold Run, Trump to Appoint 5 of 7 Fed Governors - 18th Feb 17
Gold Stock Volume Divergence - 17th Feb 17
Gold, Silver, US Dollar Cycles - 17th Feb 17
Inflation Spikes in 2017, Supporting Gold Prices Despite Increased Odds of March Rate Hike - 17th Feb 17
Roses Are Red... and So's Been EURUSD's Trend - 17th Feb 17
Gold Trade Note Sighted - 17th Feb 17
Gold Is Undervalued Say Leading Fund Managers - 17th Feb 17
NSA, CIA, FBI, Media Establishment 'Deep State' War Against Emerging 'Trump State' - 16th Feb 17
Silver, Gold Stocks and Remembering the Genius of Hunter S. Thompson - 16th Feb 17
Maps That Show The US’ Strategy In Asia-Pacific - 15th Feb 17
The Trump Stock Market Rally Is Just Getting Started! - 15th Feb 17
Tesco Crisis - Fake Prices, Brexit Inflation Tsunami to Send Food Prices Soaring 10% 2017 - 15th Feb 17
Stock Market Indexes Appear Ready to Roll Over - 15th Feb 17
Gold Bull Market? Or was 2016 Just a Gold Bug Mirage? - 15th Feb 17
Here’s How Germany Buys Time From China - 15th Feb 17
The Stock Trader’s Actionable Guide to Trump - 15th Feb 17
Trump A New Jacksonian Era? The Fourth Turning (2) - 14th Feb 17
Stock Market Yet Another Wall Street 'Witch's Brew' - 14th Feb 17
This Is Why You Don’t Own A Lot Of Stocks - 14th Feb 17
Proposed Tax Reforms Face Enormous Headwinds - 14th Feb 17

Market Oracle FREE Newsletter

State of Global Markets 2017 - Report

Investors Need Strong Stomachs… Not Big Brains

InvestorEducation / Learning to Invest Nov 13, 2012 - 02:52 AM GMT

By: Investment_U

InvestorEducation

Best Financial Markets Analysis ArticleAlexander Green writes: It’s great fun to read heroic investment stories about individuals who made fortunes as a result of exceptional insights or sheer genius.

No one is better at telling these than Michael Lewis, the bestselling author who devotes much of his book, The Big Short, to Steve Eisman, a brilliant and eccentric hedge fund manager who made hundreds of millions in the recent financial crisis by buying credit default swaps on the triple-B-rated tranches (slices) of subprime mortgage bonds.


This is entertaining reading. But it won’t do much – if anything – to enhance your own investment prowess. Trades like these are complicated… and risky. A lot of investors don’t realize, for instance, that when you sell short mortgage bonds you have to cover the interest payments on them until you close out your position.

Sure, these jerry-rigged investments were bound to tank eventually. But as John Maynard Keynes once observed, “The market can stay irrational longer than you can stay solvent.” And that’s especially true when you’re all leveraged up.

A Lesson From Warren Buffett
Fortunately, you don’t need to take huge risks or boast a Mensa-like I.Q. to succeed at investing. All you need is a sensible, battle-tested investment system and the emotional fortitude to see it through. Just ask Warren Buffett.

At the Berkshire Hathaway shareholders’ meeting two years ago, he told the audience:

“If you are in the investment business and have an I.Q. of 150, sell 30 points to someone else. What you need instead is an emotional stability and inner peace about your decisions.”

How right he is. I know, because over a 16-year period, I worked with several hundred high-net-worth investors. The vast majority of these folks were plenty smart. After all, the affluent are usually either professionals (like doctors or lawyers) or business owners. You don’t find a lot of dummies in these categories.

Yet many stumbled as investors anyway. Why? Often it was because they didn’t have the calmness – what Buffett calls “emotional stability” – to stick with an investment discipline when the financial markets got rough and the news backdrop got scary.

It astonished me, for instance, that the very same people who regretted how they panicked after the market crash of 1987, bailed out after every dip and sell-off in the years that followed. Each time their emotional response – fear of loss – trumped their logical decision-making.

Ironically, on the initial client interview – where we talked about the likelihood of market volatility and the value of sticking with a discipline – these same folks were confident that they would use a future downturn as a buying opportunity. But when the merchandise actually went on sale, only one in 10 would step up to buy the bargains. Later, when the market was much higher and the danger had passed, they felt comfortable enough to put money to work again. (As Kurt Vonnegut would say, “And so it goes.”)

How to Avoid Following the Herd
How can you avoid this fate? With four steps:

•Number one, it’s your money. You should understand the basic fundamentals of investing. Many people lose confidence and panic because they simply don’t know what they’re doing. (If you need a refresher course, check out my book The Gone Fishin’ Portfolio.)
•Two, expect the unexpected. Look back at the history of the market. Waiting behind every bull market is a bear market. And behind every bear market is yet another bull market. That’s just the nature of things. So don’t be surprised when it happens.
•Three, take the long view. If you’re investing your long-term-growth capital for use in 2020, for instance, is it really important what the market does this week, this month, or even this year?
•Lastly, understand that we are hardwired to react emotionally. When our ancestors on the plains of Africa heard a rustling in the bushes, they fled (even if it was just the wind). Those who shrugged it off and kept whistling didn’t leave as many descendants. But a fear response in the financial markets is not generally helpful. As investment legend Peter Lynch used to say, “If you’re going to panic, do it early.”

In short, the best rewards don’t generally accrue to the investors with the biggest brains. (Just ask the Nobel laureates who brought down Long-Term Capital Management.) Rather, they go to those with the strongest stomachs.

That’s a good thing to remember, especially when the markets are acting skittish, as they have recently.

Good Investing,

Source : http://www.investmentu.com/2012/November/strong-stomachs-not-big-brains.html

by Alexander Green , Oxford Club Investment Director Chairman, Investment

http://www.investmentu.com

Copyright © 1999 - 2012 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife