When you are beating the market and your account value is way up, it’s easy to think you are a brilliant investor. You begin feeling your oats, your ego begins to balloon, and you feel you can do no wrong in the market. You are ‘God’s gift to investing.’ Especially now with the market continuing to make all-time highs.
This type of thinking can lead to excessive risk taking and departing from your circle of competence. You begin to take more risks than you would’ve before. You abandon the notion of “getting the basics right.” Ego causes one to speculate instead of invest. Extremely active traders tend to be afflicted with this illness.
An adage states, “Pride goeth before a fall.” The reality is there are millions of people investing in US equities and many of them are very intelligent. As much as we might want to believe it, we aren’t special in that regard and consistently outguessing the market just doesn’t happen. Outperforming the market is a much better strategy.
We can gain an edge not by being smarter or better at investing than the next person (or institution), but by being more disciplined than the next guy. We can use process and research to create competitive advantage and to reduce risk.
Instead of thinking we have some amazing ability to early identify and invest in the next Apple (or Amazon, or Facebook, etc.), we can invest in quality businesses with a proven history of strong and durable competitive advantages. Instead of thinking we can spot a turnaround about to materialize, we can invest in businesses that are already profitable and that represent value at their current price. Instead of pretending we have some secret sauce (that no one else has) that allows us to predict the next quarterly earnings report, we can invest for the long-run.
The most successful investors are those who have their egos in check and who adhere to a sustainable process rooted in academic research and disciplined execution. Investors who are calm, patient, clear-headed, and have perspective are much more likely to succeed over long periods of time than those who let their egos create a false sense of genius and cause them to move away from the basics and speculate.
Let’s all enjoy this bull run in the market while it lasts. But it’s investing for the long haul that we should be focused on even now.
Until next time, remember…
“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic.” – Warren Buffett
This information is not intended to provide specific tax, legal or business advice and may
not be relied upon for the purpose of avoiding any tax penalties. Lewer Financial Advisors is
a multi-state registered investment advisor domiciled in Missouri.
Lewer Financial Advisors is a member of the Lewer group of companies.