How to fail

  By Guest Blogger Sinan Terzioglu

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As Garth says, most people suck at investing.  We become too emotional – fearful of losing and not having enough money for the days ahead.  We make feelings-based decisions and all too often get in our own way.  If markets were open only once a month and prices weren’t constantly available most of us would have a much better chance of achieving average long-term  returns.  But because of behavioral biases, we buy high, sell low and underperform by a wide margin. The longer the time horizon, the worse things get.

‘Investing’ means focusing on the quantity, quality and timing of cash that will be returned to you from your holdings. ‘Speculating’ is worrying what other people will pay you for your holdings.  Speculators fret over how other market participants will act and as a result engage in a greater-fool world.  Sadly, most market participants today are speculators. They’re easily distracted and focus on ridiculous things that in the long term have no impact on the intrinsic value of quality businesses.

Fidelity Investments looked at which customer accounts do the best and concluded they ‘re those of people who’ve forgotten they have an account! Similarly, some estate planners have noticed families leaving inherited assets untouched for 10 or 20 years while they work out their issues later found that those years were the best periods of performance.  The terrible investment decisions so many people make end up destroying their finances.  Investing is far from simple but it can become a lot easier if one is able to develop the right temperament.  Constantly checking quotes is unproductive and only increases the probability of making emotional decisions.  Most people use the last traded price of a security as their only feedback mechanism and rarely think about the underlying economic fundamentals of the companies they’ve invested in.

Years ago a guy approached me for help with his investing approach.  He was running a one-person business and had done quite well.  But he’d become frustrated with his investment results and was starting to realize he could have done much better over time if he’d just stayed the course and thought long term.  He was constantly checking his investment accounts – in a great mood when the markets were up and miserable when they fell.  He made all the mistakes most individual investors make by getting in his own way.

I used the following analogy that helped him develop the temperament he needed:

“Imagine every hour for the next few years a random person approached you off the street, offering you a price to buy your business.  Some days the price is great and some days the price is ridiculously low.  Let’s assume you earned $100,000 in operating income last year and over the last 10 years that’s grown an average of 7% annually and you have every reason to believe the growth will continue over the long term as the economic fundamentals of your business continually get stronger.  Some years may not be as good but most years will be very profitable.

“Now, imagine you have the TV on and see an announcement that the US Fed has raised interest rates and a bunch of economic data has missed expectations. Sentiment is plunging. Would you walk out onto the street and look for someone to sell your business to?”

Needless to say, he thought that would be ridiculous and a light went off in his head.  He stopped paying attention to the fear in the media and the constantly changing market quotes. As a result he wasn’t distracted any more.  He was able to think like a business owner (which an investor really is) greatly reducing his stress and significantly improving his long term results.

Any individual investor wanting great portfolio results must develop the proper temperament.  If you can’t, then hire a good investment advisor. I may know one.

Sinan Terzioglu, CFA, CIM, is a financial advisor and licensed portfolio manager with Turner Investments, Private Client Group, Raymond James Ltd.