When my friends ask me how they should invest, I always like to start by telling them that asking for investment advice is like asking for fitness advice. There is no perfect way to do it, only ways that are right for you based on your own circumstances and goals.
I've always been passionate about optimizing my health and my fitness goals. Over time, I've embraced a daily workout routine and I've stayed away from products universally harmful such as sugary sodas and cigarettes.
As I kid, I was always told that breakfast is the most important meal of the day. The one meal that fuels your body in the morning and enables you to avoid overeating in the later part of the day. I remember being confused and frustrated when, as an adult, I came across fitness programs that would recommend skipping breakfast altogether. In a quest for optimization, I was asked to unlearn what I thought was good for me. Similarly, after drinking cow milk during my teenage years like most kids, now studies are breaking that it may increase the risk of some cancers.
If you are trying to make health-conscious choices, you're left wondering what to believe. The list of examples is endless. And it can be frustrating when you're ready to make better choices for yourself, but don't have a clear successful path to undertake.
Investing and dieting are intrinsically similar. They both start with a wide range of universally sound advice. But if you try to learn more and optimize, many schools of thoughts appear. You can read about one approach being historically successful, only to learn later that doing the exact opposite can also be beneficial, or might even be better for you. In many ways, investing and dieting are both more art than science.
When its comes down to money or food, at the end of the day, we are more emotional than rational. Health and wealth are the result of a combination of personal circumstances and decisions we make on a daily basis. Discipline and common sense can go a long way, but many philosophies contradict one another.
It's fairly easy to recognize the many habits to embrace and pitfalls to avoid if you want to become and stay healthy or wealthy. Yet, we often lie to ourselves to justify our choices and preferences, even when it makes very little sense.
Let's review what we can learn from the fascinating similarities between investing and dieting, and how it can make us better investors.
Academia remains the best source of inspiration
You can find a plethora of advice online about optimizing your diet or your finances. The problem is that you can't be sure how reliable your source is.
The core issue is that most people have an agenda. A great example in the food industry is the sugar lobby and how it targets key media influencers, nutritionists and practicing dietitians to relay studies promoting the benefits of certain products.
Likewise, professional money managers spend the majority of their time raising funds and building assets, not working for their investors. They collect 1% to 2% per year in management fees based on the total assets they manage, not based on their performance. They are in the asset under management business more than the investing business. Their marketing and the way they promote their own performance is for the sole purpose of raising more funds.
Professional money managers, just like food lobbies, don't want what's best for you, they just want your business.
What sources to rely on, then? I believe that we have to turn to academia or to authors who have been independent in their research and work, such as:
- Benjamin Graham and the rules of value investing.
- John Boggle and the power of a broad, diversified index fund.
- Philip Fisher and the secrets to long-term growth investing.
- Warren Buffett and the importance of economic moats.
- Burton Malkiel and the Efficient Market Theory.
- Peter Lynch and the key of understanding what you own.
- Nassim Nicholas Taleb and the danger of black swan events.
Many of these authors have conflicting philosophies or ideas, and only you can decide what works best for you based on your own set of values and personal circumstances. But these authors and their research benefit from many traits that make them a superior source of knowledge:
- They are independent.
- They are not trying to raise funds from you.
- They have an outstanding track record and reputation built over decades.
Most common sense tips work across health and wealth
It's fascinating to realize how most of the common sense recommendations below apply both to your health and your wealth. Identifying these parallels can help you make better decisions for yourself.
I was reading with horror this morning an article about how a teen went blind and partially deaf after only eating Pringles, French fries and white bread for a decade. The same way a broad range of ingredients keeps you healthy, a broad range of assets keeps you wealthy.
Investing in multiple uncorrelated assets is a powerful way to limit portfolio draw-downs in any given year, without necessarily compromising your potential returns. You can find your own path in the delicate art of balancing diversification and concentration.
2) Be careful of the fads
People use the keto diet in order to lose weight, ignoring that it presents serious risks (low blood pressure, kidney stones, nutrient deficiencies, increased risk of heart disease).
On Wall Street, the dot-com boom and bust in the late 1990's is a great example of how embracing a fad can be disastrous to your portfolio. We've heard before of so-called easy ways to get rich such as the dogs of the dow or the Foolish Four in the 90's.
Here again, use your common sense. The people who want you to believe that you can achieve outstanding results without any effort are usually charlatans.
If you're promised to get in great shape without working out, there's probably a trick. Likewise, if somebody tells you that you can beat the market and generate alpha consistently with no research by simply using a "magical formula," you're probably in for a ride.
Understanding what you're doing and why you're doing it can go a long way in protecting you from bad decisions.
3) Think long term
Only by thinking about the impact of your actions over the long term can you make good decisions for your health and wealth.
A diet should be designed for the long haul. If you can only stick to it for a couple of weeks, the benefits will be extremely limited and you might end up worse off a few months later.
I've mentioned before the importance of second-level thinking brought up by Howard Marks in his book The Most Important Thing. You have to think in terms of interactions and time, understanding that despite your best intentions, your decisions can lead to a worse outcome.
Second-level thinkers think about the consequences of repeatedly eating ice cream and are more likely to eat something healthy instead. Likewise, they see that a company is expected to beat on revenue for the quarter, but wonder if guidance will be lower for the full year due to a future project being cancelled.
The easiest way to achieve second-level thinking is to always ask yourself “and then what?”
Think through time and the consequences of your decision in 10 minutes, 10 months or 10 years. Describe the things that need to go well in your bullish thesis over the short, medium and long term. Calibrate your thinking with the very long term in mind. Guidance has just been lowered for the full year? The CFO is leaving the company? You have to ask yourself:
- Does this impact the potential of the company?
- Does this change my bullish thesis about the business and the total addressable market?
- How will employees deal with this?
- What will competitors likely do?
- How will suppliers react?
- What will regulators do?
Often the answer will be little to no impact, but you want to understand the immediate and second-level consequences before you make a decision.
4) Keep your emotions in check
While human emotions serve to protect us in many ways, they also can lead to poor investment decisions. More than asset allocation or intellect, your temperament is the greatest factor in your portfolio's returns over time.
Are you investing the vast majority of your portfolio in companies based in your home country? This inclination is triggered by the same process that makes us crave "comfort food."
If you're having a third glass of wine despite the fact that you'll need to drive home, it's not a rational decision. You are probably telling yourself that "you'll be fine." You can easily identify this behavior when people decide to "double down" on their worse investment so that they can break-even faster.
A rule-based approach that removes your emotions from the equation is often the most powerful way to monitor your behavior. Not allowing yourself to drive if you had more than two glasses of wine for example. Maybe ordering an Uber (UBER) or Lyft (LYFT) to go home instead. Similarly, defining a clear maximum amount you can invest in a single company can save you from a life-altering accident.
We're all human beings, and we have buttons that can be easily pushed. The challenge should be for you to identify what temptations you are likely to succumb to and adjust your own behavior accordingly.
You can indulge once in a while
If you know that you will break the rules at some point, you need to create a specific context that enables you to indulge without it being harmful over the long-term.
For example, many people allow themselves to splurge on wine and dessert on a date night or on vacation, but they wouldn't make it a daily habit.
Likewise, a little bit of day trading here and there never killed anybody. But maybe leave your retirement nest egg and your emergency fund out of it?
With indulgence, it's all about consequences. Instant gratification can outweigh the long-term benefit of sticking to a program. Here again, the key is to define your boundaries. You can recover from a bad hangover or food poisoning, because the human body is incredibly resilient. But your portfolio might not be able to recover from hectic gambling behavior, even occasional. Trade size matters immensely, and if you get too greedy or use leverage aggressively, there will be no amount of detox or good resolutions that can put you back on track.
Finding similarities in habits
Buying a stock blindly is like skipping the gym. You can get away with it at times, but if you want great results over time, you're not setting yourself up for success.
Day trading is like a bad snacking habit. It's widely recognized as something people should avoid, yet many do it anyway. Bad habits can be very unfair. Some people end up suffering because of it, some others might do just fine. You might have a coworker that seems to be eating junk food all day long and is in a great shape. Or you have countless stories of people who have been chain-smoking all their life and are still alive and well in their 80's. Similarly, you can find plenty of people having a decent amount of success day trading. Does it make it a relevant strategy? Probably not!
Short term capital gains are like over-eating right after working out. You sold a stock because it was up 20% after a few weeks? You had a great thing going and now you wasted it. No compound interest for you, then!
Penny stocks are like cigarettes. Addictive, easy to pick up and seemingly harmless at first. Some people invest in them for years without realizing how foolish it is. Again, they might get away with it, and even possibly thrive. But penny stocks are hazardous to their wealth just like cigarettes are hazardous to your health.
Maximizing tax-advantaged accounts diligently is like a work-out program. You don't think about it, you just stick to it, and slowly start perceiving the benefits over time.
Low-cost index funds are like a good session of cardio. A run in the park or a swimming session? You can't go wrong with that and you feel at ease, with everything under control.
Hedge fund management fees (2 and 20) are like a very expensive gym membership. It's convenience at a high cost. They might help you achieve your goal if you follow their recommendations diligently, but you have spent a fortune to get there. All this for that.
Discipline is more powerful than you think
If you don’t know who you are, this [the stock market] is an expensive place to find out (Adam Smith, The Money Game).
"I don't smoke." That's what I started saying a few years ago when I decided to never touch a cigarette again. By using such an affirmative way of asserting it, I was making it part of who I am and what I do. It had become part of my identity.
It might sound obvious to someone who has never smoked, but addictions have a way of creeping back up in your life if you lack the willpower and determination to stay away from them.
Here is a list of of examples of affirmative statements that I've established over the years when it comes to managing my portfolio:
- "I don't buy stocks under $5." Penny stocks are highly speculative and a recipe for complete loss of capital. Like many investors, I started there when I was discovering the inner workings of investing. I made a lot of money, then lost a lot of money. I've made most of the mistakes you can think of. I cherish my mistakes as an important learning experience in my investing journey.
- "I always sleep on it." If I ever decide to make an investment, I never pull the trigger on the same day. A good night's sleep helps me make sure that my decision is poised, rational, and not made in the heat of the moment or due to temporary hype. I don't invest for the gains of the day or the month. I invest for the next 25 years.
- "I only invest in ETFs in my 401K." ETFs are a perfect tool for tax-advantaged retirement accounts. It prevents typical turnover to have any undesired tax implications, and they are a perfect sleep-well-at-night kind of tool to build a retirement nest egg.
- "I don't invest more than 8% of my cost basis in a single stock." While I don't mind watching my portfolio heavily concentrate over time, I refrain from adding more to a position if the funds allocated represent already 8% of my total cost basis (the sum of all funds added to a portfolio). I covered this topic before, and its main benefit it to avoid throwing good money after bad. When a stock is down 80%, it gives you the impression that you don't have much exposure to it. But what really matters is the sum of the funds you have already invested in a single position over time.
- "I don't sell." Unless I have a very compelling reason to. As illustrated below with the yearly performance of the US market over close to a century, the average annual return of the S&P 500 since 1926 is approximately 10%. For me, it's time in the market, not timing the market, that builds wealth. So I'm a buyer, not a seller. For example, there have been countless articles about compelling reasons to sell Amazon (AMZN), Netflix (NFLX), Facebook (FB), Alphabet (GOOG), or Apple (AAPL). These articles show up every other day on Seeking Alpha or anywhere else on the web ever since these companies went public. If you let the news cycle (including trade wars, currency fluctuations and politics) influence your investment decisions, you would be probably better off letting a professional handle your portfolio for you. Warren Buffett doesn't read the news before he decides to make an investment in Bank of America (BAC) or Coca-Cola (KO). Instead, he reads the company's Form 10-K. I try to apply the same mindset, reducing my portfolio turnover and looking at my stocks like businesses. As a result, close to half of the App Economy Portfolio allocation is made of companies that have returned more than 100% gains over the years. It's not necessarily the best way to invest for everyone, but it's the one that I've chosen based on what I consider the most reliable source of inspiration. Buffett, Fisher, Lynch, among others.
Of course, these are only a few examples that work for me. I'm certain you can build your own set of affirmative statements that can help you create discipline in your own investing strategy.
Bottom line: What matters is to find what works for you
Suitability is one of the most overlooked aspects of portfolio management.
At the end of the day, with food and money, it comes down to very personal and emotional decisions. If you can recognize that it takes great effort and discipline to make rational choices and achieve your goal, you are already on the right track.
Realizing that we make investment decisions in a way intrinsically similar to our dietary habits, it's easy to understand why most individual investors under-perform the market. We let our emotions take over despite our best intentions. We define an asset allocation based on goals and circumstances, but an emotionless execution will always remain the biggest challenge of investing.
Once you have defined a goal that is achievable and a framework that is sustainable based on your own circumstances, stay disciplined and keep the long term in mind. It will protect you from yourself, and you'll be amazed by the rewards over time.
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The rise of the App Economy is disrupting many industries: retail, entertainment, financials, media, social platforms, healthcare, enterprise software and more.
While keeping in mind some of the best recommendations from experienced gurus of Wall Street such as Warren Buffett, Peter Lynch, Burton Malkiel or Philip Fisher, I am trying to beat the S&P 500 index by a significant margin.
Here are some of the trends reflected in the portfolio:
Disclosure: I am/we are long AAPL AMZN BAC FB GOOG NFLX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.