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3 Principles of Successful Investors Part 1

“There are some people who, if they don’t already know, you can’t tell ’em.” – Yogi Berra

Are you one of those investors for whom things just seem to always work out well? Getting superior long term returns seems to take little effort. Whatever strategy you use seems to eventually work. You don’t spend much time or effort, yet most of the time you are feeling quite confident about your investments.

Or are you the type of investor who always seems to struggle? It seems everything you buy goes down right after you buy. When you finally sell, they take off. And the investments you hold long term mostly underperform.

We have often encountered both these types of investors. Struggling investors are far more common. They usually have trouble believing that many investors outperform with little effort. Those that find investing effortless just shake their heads at the frantic activity of struggling investors. This applies to both professional and amateur investors.

Why is it that investing is so easy for some and for others it is always a struggle?

We have found that the biggest reason for this difference is an underlying belief system of successful investors. This belief system tends to result in effective behaviour. The success of the investor tends to result more from their behaviour than from the specific investments they own.

From our years of experience, we can usually get a good idea of how successful an investor is just from talking with them and identifying their belief system, even if we know nothing about their investments.

There are 3 main principles that tend to make up the belief system of successful investors:

1. Faith

The single most important characteristic of successful investors is faith. This includes faith in the markets, in the future, in our free enterprise system, in the ability of good companies to grow their profits, and in humanity.

Successful investors tend to have this confidence and optimism. They see how much humanity has progressed in recent history and tend to see their optimism as realism. They don’t know how things will turn out all right – they just know that they will turn out all right.

This faith tends to give them a long term focus. They don’t need to keep searching for some great investment, do all kinds of transactions or get into the latest fads, because they are confident that their investments and the markets will perform well over time. Whenever their investments are down, this same confidence allows them to just see it as an opportunity to buy more. They tend to get good advice or choose their investments carefully, but then hold them a long time.

How can they outperform so easily? All you need to do to outperform is to own high quality investments for the long term and generally buy more whenever they are down. That’s all! The markets produce a good return over time and so should your investments if they are high quality. At least twice each decade, there will be a significant down market, which is your opportunity to invest more at lower prices. This alone means your return will be higher than the investment itself.

This is usually done with high quality mutual funds, broad index funds, or a well-chosen, diversified portfolio of stocks. We do it with “All-Star Fund Managers” that have all beaten their indexes long term and that we believe are the world’s smartest investors available to us.

Whichever specific investments they have, successful investors tend to have a calm confidence in their investments. The reason this is so important is that one of the single most important factors in investing is to stay invested and keep investing at market lows.

Many investors will make decent returns during a bull market, but then make the #1 mistake in investing by selling after the market tanks and losing years of growth. By selling, they miss the inevitable recovery. This #1 investing mistake is a direct result of not having faith.

Confident investors know that market declines happen, but since the markets have historically risen about 70% of years, declines are never probable. They are never focused on avoiding the next 20% down tick; but rather on being invested during the next 100% up tick.

Meanwhile, struggling investors tend to have a general anxiety about investing, a fear of losing money and a general pessimism resulting from their lack of faith.

They are constantly searching for the right investment, the right time to buy and sell, and use charts to try to market time effectively. They tend to believe that recent trends will continue and tend to “follow their gut”. Most of their information is free information from the news, internet, or other investors. They are always concerned about the “apocalypse du jour” (next crash, Peak Oil, deflation, inflation, etc.), anxious about missing opportunities, scared of losing money, and usually have a grossly exaggerated view of how risky the markets are. They are often “performance maniacs”.

Their lack of faith leads them to many behaviours that tend to reduce investment returns, such as frequent trading, market timing, performance chasing, trend following, lack of diversification, and most significantly, getting caught up in bubbles or selling after a crash.

The key point is that because successful investors have faith in the markets and their investments long term, they focus on participating effectively in the long term market growth. Struggling investors, with all their activity, end up trying to outguess random stock movements.

* This article is based on our personal observations over the years and the writings of Nick Murray, a retired advisor that I consider to be a mentor. Much of our investment philosophy is based on his principles.

Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.  If you would like to contact Ed, you can leave a comment in this post, or visit his website EdRempel.com.  You can read his other articles here.

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About the author: Ed Rempel is a Certified Financial Planner (CFP) and Certified Management Accountant (CMA) who built his practice by providing his clients solid, comprehensive financial plans and personal coaching.

Ed has written numerous articles to educate the public and his clients on his unique insights into strategies that actually work, instead of the “conventional wisdom” common in the financial industry.

Ed has trained more than 200 financial advisors and is considered the Smith Manoeuvre expert in the Toronto area. He has received accolades from Frasier Smith in his book “The Smith Manoeuvre” for customizing this strategy for hundreds of clients. His extensive experience in tax and finance has placed him in high demand. Ed’s team collaborates on each of their clients to help them create financial security and freedom.

{ 26 comments… add one }
  • Nurseb911 November 19, 2009, 11:54 am

    Faith is a good first step for sure. I think patience, saving and a long-term goals are my three major components to what I consider principles of successful investing.

    Looking forward to the next parts in the series.

  • Al November 19, 2009, 12:42 pm

    Propaganda piece and sales pitch in one.

  • Alexandra November 19, 2009, 1:21 pm

    Faith is “being sure of what you hope for and certain of what you do not see”.

    I’m not sure if “faith” alone is exactly what this article describes. The people who you saw doing well had faith in the free market system and faith in their investment strategies. At the same time, people who did NOT do well might have had faith in their religion, faith in science, and may have even had faith in their own investment strategies, despite the fact that they weren’t doing well.

    The word “faith” doesn’t fit here. What you describe sounds more like just the “buy and hold strategy”.

  • kenyantykoon November 19, 2009, 1:58 pm

    this is very informative. i was looking for a reason why super investors are against buyinh low and selling high and i have found another here, The only time an investor should sell is if the company’s structure has changed to the worse and there is enough reason to believe that there are bad times ahead that may not be easily to recover from. There is a lot of investing wisdom here and i am waiting (im)patiently for the other two parts.[i want the right investing attitudes and behaviors since am still at that stage in my investing where i am impressionable and looking for good advice]

  • sco November 19, 2009, 3:09 pm

    Is this a joke?

  • Mark Wolfinger November 19, 2009, 5:30 pm

    Faith? You must be kidding. Fith does not move markets. Fait does not make successful companies cotinue to prosper.

    Depending on faith is an dmission that you hae no idea wht you are doing and have been lucy so far.

    What garbage.

  • Kathryn November 19, 2009, 5:49 pm

    He isn’t talking about religious faith or blind faith but faith that the market will continue to do what it’s always done. Sure, buy and hold isn’t sexy but it works over time when people have faith in the system. These are Ed’s observations over many years of working with successful investors. I happen to find it interesting. It certainly supports the whole ‘millionaire next door theory’.

  • Ms Save Money November 19, 2009, 11:08 pm

    Yup I agree Kathryn,

    For the average investor – buying an holding is the way to go. I read some a while back about how a man invested on a bond and years later cashed out with a bunch of money.

  • used tires November 20, 2009, 2:51 am

    Faith is certainly an important thing, right now in the USA when it comes to faith I would say the biggest fear is what the government might do.. and how it might affect the economy. You know.. when government decides a company is “too big to fail” and as investors we are not sure sometimes whether we should put faith in the marketplace when the government may or may not just step in there and save a company. You know what I mean? Offcourse.. I am still learning though =D

    Till then,

    Jean

  • Ed Rempel November 20, 2009, 3:48 am

    Hi Alexandra,

    I had the same issues with the word “faith”. It has other connotations and can imply blind faith. However, it is the best word I could come up with (and the one Nick Murray uses).

    I thought of using “conviction”, which may be more accurate in describing conviction in your investment philosophy, but it does not really include general faith in the markets (and it sounds like a prison word :) ).

    However, we have seen this faith to be extremely important. It’s not that 100% of investors with faith are successful or that 100% of those without faith are not, but we have found it to be the single biggest difference between successful and unsuccessful investors.

    Ed

  • Alexandra November 20, 2009, 11:48 am

    Hi Ed,

    I see what you were striving for – the word faith can mean so many things to different people, and it also has a very strong emotional response – it’s a tricky word to use. I actually like “conviction” better – and it didn’t immediately bring up the image of orange jumpsuits for me ;-).

    Looking forward to parts two and three….

    Alexandra.

  • Kevin Press November 20, 2009, 3:16 pm

    Conviction is a stronger word, but let’s not get bogged down in semantics. They key point, from my perpsective, is that you’re better off in the market than out. Hardly rocket science, but it’s a lesson worth repeating.

    Where I disagree with you Ed, is on your generalization about “performance maniacs.” There are plenty of nervous investors who do themselves more harm than good trying to time everything. But there are also a lot of smart, thoughtful investors who make solid, data-driven decisions to move in and out of investments for good reasons. If you have the expertise, and the time/resources to do it right, you can achieve greater returns. Professionals do it every day.

  • Ms Save Money November 20, 2009, 9:14 pm

    I agree 100%. Sometimes, you do need to have faith because it helps reassure why you’re investing in the market. Those who only invest short term always pull out before they can even make any money and then they end up losing as well.

  • Finavigation November 20, 2009, 10:55 pm

    Financial success in general takes a certain mindset, and having that mindset makes it easier for those who go on to succeed than for those who remain stagnant both in their professional lives and in their financial goals.

    The three main characteristics of those who are able to achieve financial success are that they believe they control their own destiny, they are able to overcome their fear of change and make changes that improve their financial situation, and they are open to new ideas and constantly keep learning.

    Faith will only get you so far. It’s these other things combined with actual initiative and perseverance that foster success in life.

  • rawdawgbuffalo November 21, 2009, 4:40 pm

    i guess he was there teling china how we may be the next Zimbabwe if the dollar keeps on path as it is.

  • Ed Rempel November 21, 2009, 7:33 pm

    Hi Kevin,

    I agree with you. Having faith in the markets is not only about “buy and hold”. It’s about your attitude and inner confidence in whatever your investment strategy is.

    There are many different investment strategies – a lot that don’t work, some that do, and many that work sometimes. “Buy and hold” does beat the vast majority of strategies and as a general rule, strategies with lower turnover usually do better over time, even with professional investors.

    An important part of the “solid, data-driven decisions” is to take the emotion out of the decisions. Most top fund managers follow specific disciplines for exactly that reason – to make sure they are not making the decision for emotional reasons.

    The human “gut” is usually wrong when it comes to investing. Having faith in the markets and your investments, though, does tend to make your “gut” right far more often.

    Ed

  • M November 22, 2009, 12:51 am

    Faith is good but rebalance of your portfolio is very important according to your changing life and changing goals.
    keeping aggresive funds with faith that they will out perform the market and retirement is fast approching..faith does not help.
    Everybody had faith in Nortel??????

  • Ed Rempel November 22, 2009, 4:23 pm

    Hi Finavigation,

    Your comment made me think about whether the qualities that create success in life are the same for investing.

    Interesting comments and you have an interesting web site.

    Believing that you control your own destiny is a lot like having faith. You will also see some parallels between my 2nd and 3rd qualities and yours.

    I think the difference is that in life, you are doing it yourself, while in investing you are choosing an investment to do it for you.

    I think this is why the most common errors are different in life vs. investing. In life, the most common error for most people is the tendency to do nothing, but hope that somehow success will come to us. In investing, the most common error is to changing things far too often.

    Changes in investments are often done out of fear – that we are missing an opportunity or that we could lose money. In life, fear tends to prevent us from making changes.

    In life, we need to be able to overcome the fear of change, while with investing we need to overcome the fear of NOT doing anything and maintaining faith.

    Ed

  • Gerry November 22, 2009, 8:52 pm

    You are preaching to those who have faith in the “buy and hold ” strategy. I trade by “statistical analysis” and have faith that history repeats itself constantly and is cyclical.
    Doing statistical analysis requires a lot of time and effort in acquiring a portfolio, trusting your charts and analyzing their potential. It’s not just rolling the dice.
    As for “buy and hold” how well are your GM and Citigroup stocks doing right now, still hanging on?

  • Ed Rempel November 22, 2009, 9:17 pm

    Hi Gerry,

    As I mentioned in 16 above, faith is not just about buy and hold. It’s about having faith in your strategy (which it sounds like you do) and using a strategy for the right reasons.

    If you believe what you say, that sounds like faith to me.

    How long have you been trading? I find people that choose heavy trading strategies often choose those strategies because of a fear of losing money if they hold an investment – although most won’t admit it. Your last comment seems to imply that that you see the advantage of your strategy as avoiding bear markets.

    Do you expect to have superior risk/return in the long run, including in bull markets, Gerry?

    I have to admit I am not much of a believer in chart strategies. If you believe the market is efficient at all, even the Weak version of the Efficient Market Theory holds that nobody can systematically beat the market by looking only at past, public information. If that is true, then any strategies that relies on charts should not work in the long run.

    Having said that, I have a few investors using charts as part of their strategy that have been able to get superior risk/returns. It is not always clear whether or not using the charts is the reason for it.

    Ed

  • Gerry November 22, 2009, 9:36 pm

    Ed, I’ve been trading since 1995 and I do not avoid trading Bear markets as my software is set up to trade long or short, I expect to profit in Bear or Bull markets.
    I do not look at past public information but at carefully studying indicators in charts and how they behave with the current trends which may be from 3 months to 1 year, I am a swing trader.
    You use the word “systematically” as though ii only applies to statistical analysis. Every trader uses a system they prefer.
    Sticking to a system that works is what pays off.
    You have to have faith that your system works and that the results bear it out.

  • Ed Rempel November 23, 2009, 2:27 am

    Hi Gerry,

    “Past public information” would include any chart.

    So faith is important for you as well. I take it discipline is also a big factor with the system designed to remove all emotion – is that right?

    I’m curious, from the time that you became confident in your system, have you found that in general it works better now or not as well now compared to a few years ago?

    I’m interested in your insight into the debate:

    Those that believe the market is efficient believe that any strategy with charts won’t work because too many people look at charts and all advantages will have already been done. On the other hand, the market seems more manic and trendy, so it seems like charting strategies that follow trends would work more now. On the 3rd hand, more people seem to be using charts, so perhaps it does not work as well now as a few years ago. On the 4th hand, it is argued that the trend-following chartists are causing the trends and making the market more manic, which may make it work less consistently.

    What have you been finding, Gerry?

    Ed

  • Gerry November 23, 2009, 3:14 am

    Hi Ed
    By “Past public information” I forgot “only”.
    Yes you have to have faith in your system or you shouldn’t be trading period. But emotion always play a part in every decision to some degree whatever investment strategies you use.
    I am more confident in MYSELF therefore it works better now. I’ve had time to fine-tune it.
    1-Looking at charts means nothing because nobody can interpret them the same, there are too many variables.
    2-Trend is watching the direction of the stock in question, not the market. “Manic” means volatility so, more trades, not less profit
    3-Charting is only a tool, hammers are just as popular today as 50 years ago.
    4-The stock market will never be 100% predictable.A stock cannot be consistently volatile or stable.You can always adjust it to a new time frame to trade in, 1 hour or 10 years is a lot of perspective. Some stocks fall out of favour and new ones rebound all the time so the portfolio has to be refreshed constantly.
    IMO, that is where the time and expertise come in, no matter what system you use if you want to make profits.

  • Amit Kalia November 24, 2009, 2:21 am

    All Star funds=$129,872= 29.8% return

    Index fund=$120,602=20.6% return

    Please note the correction above.

  • Amit Kalia November 24, 2009, 5:33 pm

    Excellent article. Your faith in the markets make a lot of sense. Kudos on explaining what sets apart an intelligent vs. an emotional investor. Being one of your clients, I invested some time comparing my current and past investments of your All-Star Fund Managers with their respective indexes. I went back couple of years in order to see if index investing makes any sense.

    Comparison of All Star Fund Managers vs. respective indexes (on $10,000 investment)

    All Star Funds=$129,872= 29.8% return

    Index fund=$120,602=20.6% return

    Source Globefund.com

    Below is my opinion:

    Low cost passive investments provide comparable returns.

    It does not matter gaining 7-9% over five years or more as result of investing with All Star fund managers, because on a closer look one can see that some of the top notch funds did exceptionally well where as others sucked.

    The real gains from investing do not come from choosing best funds based on manager’s performance, they come as result of one’s personality and your principles of faith, descipline and patience.

  • Tommy July 16, 2010, 2:24 pm

    Which fund companies have the so-called “All Star Funds”?

    I am quite impressed with some of Dynamic Fund Managers. There’s in particular hedge fund with superior performance over the last 6 years. The performance graph is a perfect straight line heading upwards, EVEN DURING the worst time of Feb/Mar 2009. Now that’s hard to beat!

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