Which stock to buy?
Should you go in on that commercial investment property?
Is it best to reinvest your dividends or bank them?
Decisions. Decisions. Decisions.
If you’re an investor, there are constant decisions to be made.
So, how do you know how to make the best decisions?
Let’s turn to sports for the answer.
In sports, you either can play to win or play not to lose.
While winning from hitting a three pointer or scoring a game-winning touchdown is thrilling, another way to win is just to avoid mistakes. You win by not losing.
In tennis, it’s usually the player who has the least unforced errors who wins, not necessarily the player who hits the most winners. Studies show that in amateur tennis, about 80% of points are lost, not won.
So it is with investing sometimes.
Here’s a quick test: what’s -10% + 10%?
For many, the answer is zero.
If you’re dealing with compound investment returns the answer is –1%. In investing, the 10% loss actually causes more damage than a 10% gain.
To see the combined effect you can’t just add them up, you have to multiply them because losses don’t compound like gains. Positive and negative returns of the same magnitude do not have the same impact.
Our society places a big emphasis on “doing something”.
That mentality can be costly in investing.
While paying too much in taxes and fees are the obvious side effects of being overly active in the stock market, there’s a couple more problems with it…taking too much risk and taking too little risk.
Let me explain…
A very active style of investing can lead some to take on too much risk. Driven by paper gains in the short term, the active investor fools themselves into believing they’ve got the Midas Touch. This leads them to trade more and more, thinking that more activity will drive even more profits. This hyperactivity usually leads them to make rash, emotional decisions to buy/sell at the worst possible times. The result of this is loss of investment capital.
And that can lead to the other problem, taking too little risk.
Many hyperactive investors become fearful of the stock market. Having been burned a few times on quick, risky trades, they swear off the market and decide to put all their cash on the sidelines. This too is a bad strategy because it will most likely have them stuck on the sidelines at the most opportune time to buy stocks.
The intelligent investor knows that you don’t get paid on activity. You get paid on results. Therefore, to win at investing you should not only focus on wins, but avoiding investing mistakes. In order to succeed it is necessary to know how to avoid the most likely ways to fail.
If you asked me what I do on a near daily basis to ensure I make good decisions with my investments, the answer is this – nothing. Absolutely nothing the vast majority of the time.
As Buffett has said, you don’t need to be brilliant to be a successful stock investor. You don’t need to be extraordinary. Being ordinary will work just fine.
Look for ways in your investing style that you can benefit from by the taking an ordinary approach, where you focus on not losing. Because when you don’t lose in investing, you win.
Be free. Nothing else is worth it.
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