For anyone looking to build wealth, the story of Peter Lynch offers great insight into the ‘what-not-to-do’.
Peter Lynch is widely considered as the most successful fund manager in history. He ran an investment fund that returned 29.3% per year for 13 years – double the market – making it the best-performing mutual fund in history – ever.
Earning 29.3% per year for 13 years would have turned $100,000 into $4.3 million – an incredible amount of money in such a short time.
But here’s why this story is interesting: the average investor in his fund actually lost money.
That’s right. While he and a handful of investors made millions, most people who invested with him lost money.
The difference between those who lost and those who gained boiled down to one key element: psychology.
You see, if you had invested $100,000 into the fund in 1977, and just left it in there for 13 years, it would have turned into $4.3 million.
But the average investor didn’t leave the money in the fund. Instead, they constantly traded in and out of it.
When the fund lost value, they panicked and sold. And when it increased in value – they bought more, thinking it would keep skyrocketing higher.
In other words, they were scared to lose money when the fund dropped in value and got excited when things went well.
They bought high… and sold low.
But as I’m sure you know, buying high and selling low is the exact opposite of what we should be doing. We should buy low and sell high.
Unfortunately, most investors let their emotions make their decisions, and that’s the number one reason they lose money.
Benjamin Graham, the mentor of Warren Buffett put it this way:
“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
And your own psychology is the hardest thing to control in investing. When you invest in something like a stock that goes up and down in value daily, and that you can easily sell – your emotions often end up taking over the game.
But that’s the exact behavior that will lead us to financial destruction.
You see, all investments fluctuate. Sometimes they go up in value, sometimes they go down.
This volatility happens because people in the market buy and sell constantly, most often driven by psychology and emotions that have nothing to do with the performance of the actual investment.
If you think this fluctuation (called volatility) is reserved for stocks, I’d urge you to reconsider. The price of your home fluctuates too. But getting a daily quote on your home is highly impractical, and selling it takes time.
(That’s why a lot of people love real estate, by the way. They don’t have the emotional ups and downs – and in the long-run, the price trajectory tends to be up.)
Some people shy away from owning stocks for that reason.
But they shouldn’t. Stocks are a powerful wealth compounder. In fact, owning shares in productive enterprises has been the single most effective way to create wealth for centuries.
It’s just gotten harder to own them, because now that we have access to stock quotes every minute of every day – it’s easy to get entangled in the emotional ups and downs of the market.
In fact, it’s like a casino. It’s addictive.
But instead of the market using you to entangle you emotionally, you need to learn to use the market to your advantage.
Consider the following steps to get you started…
Step 1: fix a pre-determined price at which you’re going to sell an asset (if you ever plan to sell it). I tend to hold most of my investments for the very long-term, but if you have a shorter-term asset you want to trade, fix a price upfront to avoid making an emotional decision.
Step 2: realize that when an asset temporarily falls in value, it is an opportunity to buy more of it – not to sell. If you’re invested in a business or trend for the long-term, a falling price just gives you the opportunity to buy more at a better price.
Step 3: do nothing.
Most of the time, you are better off doing something more productive with your time than following how your investments are doing on a day-to-day basis.
Afterall if you plan to hold for the long-term, why bother checking them all the time?
As an investor, you have time on your side and your emotions against you.
That’s why the most important skill of an investor is to do nothing.
French philosopher Blaise Pascal said it best when he said that “all of humanity’s problems stem from man’s inability to sit quietly in a room.”
The same applies to investing.
Think about it this way: the market can go any way tomorrow – up or down. But historically, it always goes up over time.
So if you want to be happy when looking at your portfolio – just look at it less often.
The human brain is wired to fear losses much more than to get excited about gains.
Thus, the key is to decrease your odds of looking at temporary losses that could derail your investment plan.
Because in the long run, the worst detractor to your investment success is yourself.
You don’t need to check your portfolio every month, or even quarter. You certainly don’t need to check it every day.
If you have a long-term perspective (which you should, most of the time), you should be comfortable checking it even just once every six months, or once a year.
In the meantime, go focus on the things that matter in your life, and let time do the magic of compounding your way to wealth.
It’s the best way to be successful.
To freedom,
