I was recently in South Africa, where I was reminded of Nelson Mandela’s incredible legacy and amazing achievements. At the time I was also reading a book written by Michael Friedlander (Detecting the Scam: Nelson Mandela’s gift), which is about Mr Mandela’s negotiating skills and how those skills might be applied in avoiding scams in the future, a la Bernie Madoff. This got me thinking about Mr Mandela and what lessons we can draw from this remarkable man when considering our own investment strategies.
Define your goals
Mr Mandela’s goal was to end apartheid and establish a democratic South Africa where people had equal rights. His singular commitment to this goal guided his decisions and actions, and kept him on course even when things went awry. Likewise, you should establish a goal for your investments – be it retirement, college education or perhaps a home purchase. By establishing a goal, you’ll have a beacon to guide your decisions and set you on a clear path. You won’t be led astray by short-term losses or market volatility. Without a goal in mind, you’ll be lost at sea.
Take time to plan a strategy upfront
Mr Mandela understood the power of having a well laid-out strategy. From negotiating his release from prison, to ending apartheid, to ensuring a smooth process of peaceful transition, Mr Mandela took the time plan a well thought-out strategy in advance. If you saw the film Invictus (based on John Carlin’s excellent book, Playing the Enemy) you would have had a glimpse into the master-strategist at work.
When it comes to investing, a strategy is equally important and this usually takes the form of an asset allocation. Asset allocation is essentially the strategy of diversifying your investments across different asset classes to limit your downside risk. The old adage “Don’t put all your eggs in one basket” is what asset allocation is all about. Spend time understanding your risk parameters, goals, investment time horizon etc, and then put together an appropriate asset allocation upfront to guide your future investment decisions.
Twenty seven years in prison did not stop Mr Mandela from pursuing his goals, and achieving them. On the contrary, he used that time to develop strategies, study and learn about the Afrikaans people so that he might understand them better, even using the time to learn how to speak their language. All of these were key when, years later, he ultimately sat down to successfully negotiate the future of South Africa with the government of the day. When investing for the long term, be patient and don’t be swayed by daily market movements or the news flashes you see on TV. Once you have set your asset allocation, stick to your strategy by rebalancing periodically instead of going on wild buying sprees in search of quick riches. This may seem boring, but remember to be patient in achieving your goals over the longer term. Creating wealth is like planting a seed – it takes time to grow.
Don’t be swayed by your own emotions
After suffering hardships at the hands of South Africa’s rulers, it would have been easy for Mr Mandela to become bitter, belligerent and vindictive. But for him, a peaceful solution was not only preferable, it was an imperative part of his overall strategy to achieving a legitimate democracy in South Africa that was sustainable in the long term. He stuck to his guns, put emotions aside and implemented what he thought was best for his people and the country at large. Emotional control is also vital in investing. No matter which strategy you use, success or failure usually comes down to whether you can hold on through the difficult months and years without losing your nerve and reacting emotionally to steep and gut-wrenching market movements.
We’ve written before how being over-confident with your investments can lead to disaster. Thinking you can consistently beat the market or predict which way things will run will lead to bad decisions and will take you off course. It’s rare even for active fund managers to beat the benchmark every year, before costs. If you constantly try outsmart the market, not only are your chances slim but once you factor trading costs and the like into the equation, the odds are stacked against you. You are, once again, generally better off being patient and sticking to your strategy of periodic rebalancing.
Many ascribe humility as one of Mandela’s defining attributes as a leader and human being. We’d do well to emulate the humility, patience and fortitude of Nelson Mandela when it comes to our investments – and, more importantly, our lives.“I was not a Messiah, but an ordinary man who became a leader because of extraordinary circumstances.” Nelson Mandela