What separates the ordinary from the extraordinary? I believe consistently doing the best with what you have with daily choices and actions. In a word: habits!
When you use the power of choice and habit, outside forces play a secondary role. It doesn’t matter how educated you are, what occupation you choose, how much you earn or who you know. What does matter is what you do with what you have today.
Habits Make the Difference
For instance, take Gladys Holm who, as a secretary, earned no more than $15,000 a year throughout her life. Yet she left $18 million dollars to a hospital for heart disease research when she passed away! Gladys had the opportunity to invest in her employers’ stock over her career and she did. She also had the opportunity to invest in other stocks (like all of us do) and she did. She had the opportunity to participate in her employer’s stock option plan and did. Notice the trend… she had many opportunities and took advantage of each one to the degree she could with her modest salary. She became known for driving her fire-engine red Cadillac and delivering teddy bears to children at a local hospital in her Chicago neighborhood.
While the S&P 500 remained near its all-time high, the recent massive selloff in the technology sector went mostly unnoticed. But for investors who follow the so-called “FANG” stocks (Facebook, Amazon, Netflix, Google) the hit was painful: About $60 billion in value was wiped out in just one afternoon, representing the largest selloff in nearly 2 years.
The wipeout was a function of just how big these companies have become and the position they are in with new tax reform looming. Tech companies are expected to receive little benefit given its already-low average tax rate of 18.5% (below the 20% proposed rate).
This has caused investors to rotate out of the tech stocks and into the financial services sector, which stands to benefit more from a corporate tax rate that would drop from the current 35% to 20%.
Interestingly, the S&P 500 was relatively unaffected while this rotation into financials and out of tech ensued. The index’s volatility actually remained low, as did correlations among the S&P 500’s member stocks.
In other words, the diversity offered by the S&P 500 Index allowed for the index too remain relatively unscathed by the trading within the tech and financial sectors, a key reminder to investors that having proper exposure across the markets continues to be important with the S&P 500 near its all-time high.
Does intelligence equate with investment management success?
What might it take to succeed in investing? Intelligence alone? You have to be intelligent to get into Mensa. They only accept applicants with IQs that place them in the top 2 percent of the population. One might expect that if Mensa members formed an investment club, their returns would exceed market averages, or at least match them. In actuality, between 1986 and 2001, while the S&P 500 was returning a robust 15.3% annually, the Mensa Investment Club had average returns of 2.5% per year.
How did these geniuses and near geniuses manage such poor results in such a strong market? Their basic problem was a lack of discipline. Instead of using their intellects to determine a sound investment approach and sticking with it, they got sidetracked into exploring trendy new tools and theories of how to predict market trends. When one strategy didn’t work they tried another. They made frequent trades, thus increasing their transaction costs. In short, they provided a perfect example of Warren Buffett’s comment: “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.” Common sense and discipline will beat erratic genius every time.
The financial markets are now closed for the year and with all of the theatrics the verdict is in. Those investors with the following five characteristics prevail over those who fall victim to a host of mistakes and unsuccessful approaches:
- Investing from a superior position of financial strength.
- Being well prepared for a range of possible outcomes.
- Having an investment philosophy and approach you can confidently stick with and win with through thick and thin.
- Tuning out the noise, taming the emotion and focusing on what you can control.
- Investing for long-term success and, in the process, avoiding anxiety-toxic predictions, moves, comparisons, concentrations and traps.
Nearly eight weeks after his election, emotions about President-elect Donald Trump continue to run high.
There’s no doubt that Trump was a divisive candidate, and he is already saying and doing things that have pleased some and discouraged others. But as investors contemplate the next four years under this president, they should pay attention to facts and numbers and be on guard against emotional decision-making.
It’s common for investors to overestimate the impact that Presidential election results have on investment markets. Prior to the election, many commentators predicted a market crash in the event of a Donald Trump victory. That didn’t happen, of course; to the contrary, the market has risen. That’s an example of the strength and adaptability of the markets: They have a long history of digesting jarring and unforeseen events, and then moving forward.
The challenge of performance measurement
Periodic reviews of an investor’s portfolio helps ascertain whether the investment process is working, but more importantly, whether it’s on the right course for the individual investor.
The Beardstown Ladies was a 12-woman investment club that gathered monthly and managed their own stock portfolio. They became celebrities in the mid-1990s when news of their track record went viral: since their 1983 inception, The Beardstown Ladies claimed their portfolio had returned 23.4% versus the S&P 500’s 14.9% return. But in 1998, an audited performance record was released showing the club’s actual returns were actually 9.1% per year.
On Tuesday, Donald Trump won the Republican nomination for President. This news likely caused much elation, disgust, and nothing in between.
But among those who call themselves Republicans, this marks quite a shift in their thinking from last year. In an April 2015 poll of registered Republican voters, Jeb Bush led Marco Rubio while Donald Trump … wasn’t even on the list!
What can you learn about systematic investment management from Henry Ford?
Henry Ford is recognized as the father of the auto industry, largely on the strength of one innovation: the automotive assembly line. Looking back at the process he pioneered, Ford recalled the inefficiencies it replaced:
A Ford car contains about five thousand parts. … In our first assembling, we simply started to put a car together at a spot on the floor, and workmen brought to it the parts as they were needed in exactly the same way one builds a house. … The rapid press of production made it necessary to devise plans of production that would avoid having workers falling over one another. The undirected worker spends more of his time walking about for materials and tools than he does in working; he gets small pay because pedestrianism is not a highly paid line.†
Ford knew that in his new system, the assembly line, there were high-value tasks, such as welding the parts of a car together, and there were tasks with little or no value, such as fetching tools and parts. The more workers were occupied by the former tasks and not the latter ones, the more efficient the overall system became.
An Ill-Advised Investment
In 1929 Winston Churchill, the future British Prime Minister, was touring the United States and Canada. Churchill had just stepped down as Chancellor of the Exchequer, a high government post equivalent to the Treasury Secretary in the U.S. Freed from his duty of overseeing financial policy for the British Empire, Churchill had time to focus on his personal wealth management and investments. In a letter to his wife, Clementine, dated September 19, he boasted of his success in this new pursuit:
I was watching CNBC this morning and the interviewer began the interview with the two portfolio managers invited onto the show and the interviewer lead into the segment with the following question which then became the initial banner for the viewing public; ”election years; steeped in market uncertainty, will the market be down?
I thought the two guests on the show did an admirable job of answering the interviewers questions, but it provided to me a crystal clear contrast on the differences between the investment professionals goals and the goals of the interviewer; The investment professionals were attempting to educate the viewers to their firms unique investment philosophies on a macro level basis, where the media personality was trying to gain additional viewership.” There is nothing wrong either side’s points of view as they were just doing their job, but one needs to understand what their respective goals are and act accordingly.