Note: This blog is the fifth and final installment in my series on the Five Virtues of a Wise Investor. Read about the other four virtues: No. 1: Curiosity, No. 2: Courage, No. 3: Thrift and No. 4: Patience.
If you play poker, you may already know that the most dangerous way to approach the game is to assume you’re the smartest person at the table. Overconfidence—or a lack of humility—almost always leads to disaster.
I tell clients and friends all the time that the same is true of investing: If you think you’re smarter than everyone else—and can even out-strategize the market itself—you mistakenly believe you have skills you don’t really possess. In particular, you’re fooling yourself if you think you can time the market and determine when to buy and sell your investments. The truth is that even financial professionals can’t time the market. It’s just not possible.
As I explained in my blog on overconfidence, a well-known study by UC Berkeley’s Terrance Odean showed that overconfident investors tend to buy and sell more often than their more humble peers. Constant trading caused investors to lose money, and make the wrong decisions at the wrong times.
In my opinion, investors who possesses the virtue of humility will:
- Admit that they can’t time the market or outsmart everyone else
- Maintain a well-diversified portfolio, since they know they can’t accurately pinpoint the most profitable investments
- Refrain from making impulsive changes to their portfolio, because they don’t assume they have a crystal ball and can foretell the future.
- Seek the counsel of experts, and incorporate those insights into their investing strategy as appropriate
“I Don’t Know”
Being humble means being okay with admitting that I don’t know. That may be the most powerful admission a wise investor can make. Most people make investment mistakes because of false confidence over future events or how a specific investment will behave.
As a professional investor, it takes courage even for me to admit to what I don’t know. After all, don’t clients pay me to “know” a lot of investment-related strategies? I do know I can determine if an investment is a good bargain. I know which investments are good diversifiers. I know when I am being compensated well enough to take risk. I know when I’m not being paid well enough to take risk. I know I can evaluate the level of risk I am taking. In other words, I know what I can do and what I cannot do.
The “I don’t knows” are why I diversify. “I don’t know” is why I don’t time markets. “I don’t know” is a good reason why I’m skeptical of new investments. I take time to do analysis on new investments because there are things “I don’t know.”
Admitting “I don’t know” is a powerful statement for a wise investor with humility.
Putting it all together
In addition to humility, I’ve described in this blog series how important it is for investors also to possess the virtues of curiosity, courage, thrift and patience. So which of these are the most important characteristics upon which to focus?
Actually, the answer is: all of them. These five characteristics are really very synergistic. They work together like puzzle pieces. To be a really successful investor, you would do well to develop all of these virtues.
I’d love to hear your questions and insights about all of these virtues. Feel free to contact me directly by email or at (973) 425-8420.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.