This is a very big topic which I am not so confident about writing. Unfortunately it’s the topic I chose for this month’s newlsetter, so I am hoping that by writing about it I can become a bit more confident about it, as I have found that often the best way to become more confident about something you fear is to just do it.
We can fear a fear a thousand times in our head, or we can face that fear once only for real. It seems to make economic sense to me that I should face my fear of writing about how to become a confident investor once by actually doing it. So here it is.
How can we remain a confident investor, regardless of market conditions? We may need to discover the source of where our lack of confidence comes from first.
A different focus: external vs. internal
It is not hard to observe that investors’ confidence has been shaken since the GFC. These days many investors are on full alert to any bad news and the last few weeks’ stock market volatility has been pretty much all that was needed for them to switch off the investment radar for a while.
If we examine what factors investors tend to focus on, we can roughly group them into two categories:
- Internal factors: these are factors that you have a lot more control over such as your financial position, your time, your quality of work, your financial situation, your own emotions and behaviour, etc.
- External factors: these are factors that you have very little control over, such as market conditions, interest rate movements, other people’s emotions and behaviours, etc.
First of all, we can look at what percentage of our focus is on the external factors we have little control over, and what percentage is on the internal factors we have a lot more control over.
If we find ourselves spending most of our time tracking market movements and very little time tracking our own expenses, we can see our focus is mainly on the external factors.
Has all the time we have spent over the past few years trying to control something we can’t and not controlling something we can, the reason we have lost our confidence?
For thousands of years, the military bible Art of War has been studied and followed by people from all walks of life. It teaches people how to become more confident and survive during the most challenging market condition of all – war!. Maybe we can learn something from it:
“To secure ourselves against defeat lies in our own hands, but the opportunity to defeat the enemy is provided by the enemy themselves.” – Art of War, Sun Tzu, 500B.C.
Sun Tzu’s message is clear: focus on what you can control (i.e. the internal factors), and the opportunities will come to you from what you can’t control (i.e. the external factors).
If I were to translate the statement “focus on what you can control” into some real life examples, I can think of the following:
- Reduce unnecessary waste of your money and time;
- Improve the quality of your work, whether you work for yourself or others;
- Improve your work income by taking more responsibility;
- Put your income surplus into good use such as investing to create more jobs;
- Control expenses and ensure you buy value for money;
- Dispose of non-performing assets;
- Contribute more to the community and create more value for others;
How easy is it to do even some of the above if our focus is preoccupied by the ups and downs of the market all the time? Not easy at all!
If we remain focused on what we can control while the majority of other people focus on what they can’t control, we will have little competition in making a good living, and we will have more financial resources and improved confidence.
The source of our focus
Why do investors tend to put more focus on market movements (i.e. external factors we have little control over) than our own financial conditions (i.e. internal factors we have a lot more control over)?
The answer can be traced back to our daily life outside of investing, as our investment behaviour is often a reflection of ourselves.
Take a moment to imagine 10 people you know from among your family and friends. How many of them spend too much time worrying about what other people may say or think about them? Now compare how many of them generally live life by deciding things for themselves? By doing this you can see why the majority of people still rely heavily on external opinions to tell them what to do.
The habits we form outside of investing can get carried forward into investing often without us realising it. If we let other people decide whether we are good enough in life, we may unknowingly let the market decide whether we are good enough to invest.
The best investors completely ignore “the market” and instead follow their own internal “advice”. As Warren Buffet once said “As far as you are concerned, the stock market does not exist. Ignore it”. If we know our investing history, we can easily see out of these two parties which side has more power over the other : Warren Buffet or the stock market.
If we don’t want to let external market conditions affect our investing confidence and decide for us what we will do next, the solution for gaining more confidence may not come from a better understanding of the market. Initially it could start from a single decision that we will have more say over our own lives from now on rather than letting other people do that for us.
I’ve listed a few examples here to show how we can follow our own principles without being affected by others’ behaviour or opinion::
- We will still do a good job, even when we are not appreciated by our family, friends, colleagues or bosses;
- We will still do the right thing by others, even when they have done the wrong thing by us;
- We will still respect someone even when they do not respect us;
- We will still praise someone for their merits openly and sincerely even when they criticize our flaws to others behind our back.
Pretty tough to do, isn’t it? I am the first to admit, it can be hard to even do so 50% of the time!
This is the challenge we all have to face in life: how to live the way we truly want without being influenced by others’ opinion and behaviours. We usually don’t get to find out how well we can do this until we put our money into the markets; our bank account balance ultimately gives that score away.
A different paradigm
We have all heard of both “greed and fear” and the idea that you can’t have one without the other. If we are driven by strong greed for gain, we will have to face the strong fear of loss. This is no different to being to driven to take the credit for success usually you also have to accept blame for failure as well.
Is there a way to move beyond the “greed and fear” combination as an investor? If we can, then our investing confidence is no longer an issue as we do not have the fear of loss without the greed of gain.
Maybe we need a paradigm shift here somewhere? Albert Einstein once said: “We can’t solve problems by using the same kind of thinking we used when we created them.”
I often question the workability of the term wealth creation. It makes people think that they are the ones who are creating the wealth or making the money. Investors within the “wealth creation” paradigm have a strong focus to “make the money”, hence their greed for gain becomes part of their investing activity, and we can never resolve the issue of the fear of loss when we believe that we are the ones who made the money or created the wealth.
What if we choose a different paradigm? One in which we don’t see it as being all aboutmaking the money or creating the wealth, but one in which we are given money or wealth to manage according to our ability and willingness to manage it well while we still can?
That moves us from the wealth creation paradigm into the wealth stewardship paradigm.
Half of the proof of validity for the wealth stewardship paradigm comes from the fact that we are really temporarily managing the money or wealth while we are still alive. We can’t take anything away with us and we will all end up with nothing one day!
The other half of the proof will have to come from our own observation after realising the existence of such a paradigm.
Under the wealth creation paradigm, we tend to do the following:
- Focus on the market to look for opportunity to make the money;
- Take personal credit for money made and be blamed for money lost;
- Become greedy when the market is good and become fearful when the market is bad.
However under the wealth stewardship paradigm, we would do the following:
- Manage money with care and diligence without unwarranted speculation and wastage as it is a good steward’s mandate to do;
- Put money into good use for the society as it is a steward’s responsibility to do;
- Take no personal credit for money gained (and hence no personal blame for money lost), as money is given to us due to our willingness and ability to manage more.
- Take more responsibility to focus on better managing the money we already have rather than chasing the next opportunity beyond our financial responsibility level, as more money will only be given to people who have already demonstrated they can manage their existing amounts well;
- Have confidence in knowing that the only way we can have less money to manage is to not look after the money we have already been given.
If we do all this, then the markets and external factors will have little to do with anything.
Under the wealth stewardship paradigm, we have a lot more control over our financial destiny as long as we are able and willing to manage money well.
We can almost think of money or wealth as a live person. If you want more people to come to you, you need to provide them a friendly and organized environment, with good opportunities for them to contribute and make a difference, ideally towards greater purposes.
Hence managing money well can come from two simple steps:
- Treat your money and wealth with respect and care, regardless of how small it may be at the moment; For example:
- Keep track of our income and expenses, follow an investment plan towards a clearly defined financial objective;
- Establish good money management habits and follow sound money management policies;
- Put your money and wealth into more effective use so that it has more reasons to be managed by us.
- Invest our money where they will create better living standards and jobs rather than “money for nothing” type investments;
- Invest our money into creating opportunities for others to become more satisfied, productive and responsible;
I am sure we can find exceptions to the above rules and we might wonder if they will work for us all the time. For example, we have all seen people who don’t manage their money well according to our descriptions here still doing well financially, and we have seen some people who seem to have done the wrong things by others still grow rich.
We could try to dig further for more explanations why sometimes the not so desirable behaviours can still lead to good financial outcomes, or we can simply stick to something we believe in and ignore the external factors. We can look for the reasons to change our beliefs, or we can let our beliefs become the reasons. Imagine if we find out one day we are meant to have a certain amount of wealth regardless of how we get it, why wouldn’t we choose the way we feel comfortable within ourselves?
So I am going to stick to my beliefs here despite some obvious contradiction within the human single life time measurement system, and I hope that you stick to yours regardless of whether we agree with each other.
So where does an investor’s confidence ultimately come from?
There may be many valid answers to this question, but from my observations over many years of dealing with thousands of property investors; an investor’s confidence, in my very biased opinion, ultimately comes from the following two key components:
- Demonstrating the fact that we appreciate and value the wealth we have been given, and doing our best to manage it well;
- We don’t learn how to manage money after we have a lot of money, we usually need to learn how to manage money well long before can have a lot of more money to manage.
- We often receive what we give others, not necessarily what we want for ourselves.
If the above sounds too philosophical, you are probably right, half of the time I don’t know what they mean either. So let’s look at another way to do this by following 2 simple steps:
- Internal factors first: Ignore the external factors such as the market conditions for a minute, put our focus on setting up a clear financial objective and following a workable investment plan. Then decide whether we are ready to invest some money safely at this very moment;
- External factors next: If we are ready to invest some money, then we will see if the market presents any good investment opportunities, such as under-valued assets, regardless of whether the market has come down from a high or come up from a low to get to this point. If we can find good value in the current market, we will invest our money; if we can’t, we will wait.
There are many ways we can find value under different market conditions. I have my own formula that works for me and many of our clients (but not all clients), and many other industry colleagues have their own winning formulas that work for a specific group of people.
This is one of the main reasons why we keep reading investment property magazines to learn from property specialists and successful investors who have their own formulas to do well during good times and bad times. All we have to do is to develop our own strategy and stick to it.