During a recent interview I was asked a number of questions, two of which directly related to my relationship with clients and their money. The first was, “What stresses you?” to which I replied, “There is nothing more stressful than looking after other people’s money. When people trust you, they trust you implicitly. That’s a heavy burden to carry.”
The second question was, “Is your reputation as a financial ‘guru’ an added source of stress?” My response was, “Well, yes. People expect you to know what will happen tomorrow and for the foreseeable future. I don’t know what’s going to happen, but I understand my clients’ needs and requirements and plan accordingly. I would never make an investment for a client that I wouldn’t make for my mother, myself and my son. That doesn’t mean I don’t make mistakes, but I have a simple philosophy: if you make a mistake, fix it, learn from it and don’t look back.”
I’m sure I’m not alone in this. The reason is simple. Investors want to be winners. They want to make the right investment decision at the right time — always.
Market price fluctuations
Janice Dom, an American psychiatrist, sums it up very well. “Trading is among the most challenging of any games that people can learn and, when investors trust investment advisers and portfolio managers, they want to see instant and positive results.”
After all, if they knew today that the share price would drop tomorrow, then obviously the question they would ask themselves — and their adviser — is why did we not wait until tomorrow and buy at the lower price? It seems so straightforward but, unfortunately, money is made by taking a certain amount of risk.
Market prices will always go up and down over a short period of time and it’s hard to judge true ‘monetary value’. Therein lies the problem.
I have never come across an engaged woman who did not have a valuation for her diamond ring that reflected a far greater value than was actually paid. Unfortunately, should you try to sell the ring the following day, not only are you unlikely to obtain the valuation ‘value’ but it‘s also less likely that you’ll get back what you paid.
Most home owners and investors in property know that, over a long period of time, property values will increase. However, if you bought property today, paid transfer fees and then tried to sell the property the next day, after including the agents’ commission, it‘s likely you’ll lose money.
Business valuations
We look at businesses that were started years ago and see how successful they are today. However, we need to ask those business owners about starting their business, buying furniture, equipment and stock, taking premises and employing staff — would they have been able to sell the business the next day and show the profit that they could show today?
The industries that I’ve referred to, namely diamonds, property and entrepreneurial businesses compare with the types of listed companies that we invest in, in world markets. I’m sure you will agree with me that it’s very difficult to make an immediate profit on any of these investments.
Doing business
The question must therefore follow, “Why would you believe that buying an equity today will result in profits tomorrow?” The secret to long-term investing in the market is not about constantly watching what is happening. This is one of the hardest things to do.
You cannot value any other investment on a daily basis except for equities.
Unfortunately, to lure you into this state of constant observation there’s just too much information at your disposal by way of radio, TV and press. Depending upon your findings these will either elate or depress you on the decisions you made. I cannot emphasise enough that while it may be fun to watch your share prices daily, these equities are probably only a small portion of your entire diversified investment portfolio, which is for the long term.
Dom gives this advice: “Inexperienced traders equate losses with being a failure, being plain stupid or getting poor advice. Seasonal traders see losses as part of doing business.” I am not suggesting that investors become traders. What I propose is that investors stop watching their investments so regularly and, more importantly, if the markets do come down, be prepared to just sit tight and realise it’s all part of creating wealth.
To quote Warren Buffett, “The road to success is usually paved with wrong decisions.”