You know I like to read. I came across a new author recently named Ryan Holiday. If you know of him – why didn’t you tell me to read some of his stuff!?! He has a rather interesting background, however, let’s dive into the reason for this week’s article. His book titled Ego Is the Enemy is phenomenal. Ryan has created something that reaches into history, philosophy and literature to share stories of how our own worst enemy is often our own ego. I figured it was worth taking his approach with how we as investors can be our own worst enemy. I’m going to borrow heavily from Morgan Housel and Ben Carlson as they both wrote recently on some investment truths that challenge our egos.
- Would it surprise you if I told you investment success has much less to do with math and numbers than psychology and temperament? The ability to maintain your discipline when the market turns down will serve you better than an algorithm competing against all other investors. Patience and controlling impulses are personal battles you need to win.
- Some of the most important factors for successful investing are some of the most boring. Keep your fees low, don’t incur lots of transaction costs by constant trading, pay attention to your taxes year-round, and spend less than you make. Also, don’t do stupid stuff! I won’t call anyone out on stupid stuff, but not getting the employer match on your 401k because you would rather buy a “tax-free annuity” is questionable.
- Focusing too hard on hedge fund managers is dangerous to your mental and fiscal health. These guys are all over CNBC because their billion-dollar world seems so exciting. They are so exciting that many university endowments throw money their way. The reality is the average university endowment wasn’t able to beat the Barclays Aggregate Bond Index for a 10-year period.
- The right answer when someone asks what the market is going to do is – “I don’t know.” No one knows each and every day if the market is going to go up or down. This is amazing considering there are only two choices. Again, investors are not interested in hearing an investment manager say he has no idea if the market will go up or down. Please remember that financial advisors have as much influence on what the market does as weathermen do with weather forecasts.
- Building an investment strategy based upon CNBC recommendations, glossy advertisements, commercials, and dinner seminars often provides much more benefit to the salesperson than you as the investor. There’s a reason why these sales pitches are designed around the concept of “sell the sizzle, not the steak” where the goal has always been to focus on the customer’s fear and greed instead of the evidence.
- Compound interest is the magic sauce when it comes to investing. Warren Buffett has a net worth of roughly $76.7 billion. Care to guess how much came to him after age 50? $76.4 billion. He has been one of the best investors of all time, and much of this is due to a long-term focus and the patience to let the magic of compounding interest work for him.
As a reminder, you may remember I prefer to get my books from the library. Well, this is one author where I have broken down and bought some of his stuff. I would definitely recommend borrowing a copy of Ego Is the Enemy from the library. While it is not a behavioral finance book there are lots of examples in there that fall right in line of how we become our own worst enemy when it comes to our investing success. I promise it is worth the read.