The Hardest Thing To Do In Investing

Recently I got into a discussion about the hardest to do in investing. Like it or not, emotions always come into play when it comes to investing. Some investors identify the fallacies and try to remove emotion from the decision making process and succeed, while most people tend to fall for the inherent psychological nature we humans are programmed with. Investing at some point in time becomes more about understanding human/market emotions and psychology than anything else.

Investing to grow our assets over the long run is a shared goal that we all have, but it is also important to remember that it is a zero sum game. Every time you buy a security on the market, there is a seller and vice versa. So, we need to ask ourselves the question: what does the counterparty know that we do not. Is the other person buying or selling with potentially more information/knowledge on the matter or is the move based on ignorance? This is really hard to fathom on a scale as big as the stock or bond market and macro issues that are not under anyone’s control. Chances are, there is no one single answer for all cases. As they say, predicting the future is a fools errand, but so is ignoring market psychology.

With that mind, I wanted to discuss what is the hardest thing to do in investing? I gather it is one of the three options below. Whether you agree or disagree, feel free to share your thoughts in the comments section below.

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Market Timing

“It is About Time in the Market, Not Market Timing!” — this is a quote that is repeated over and over in the media and blogosphere by anyone and everyone, until those words completely lose their meaning and simply become something that is repeated as a mantra. While I agree with the overall premise of the argument, the concept is a bit more nuanced and needs addressing. In one way or another, market timing has to play a role in each investor’s moves else you might as well just set your cash on fire and watch the flames.

What is Market Timing

Over the course of last few months, as I have resorted to selling more of my broad equities, I have received a lot of emails and comments calling me out that I am trying to time the market and making “one of the biggest mistakes of my life”.  Really? Biggest mistake of life? How exactly? How is going to cash and not participating in this stock market charade the biggest mistake of my life? It is not just me…I see similar comments on other blogs when they sell their equities and move to safer investments or cash.

Market timing for most people seem to equate with trading in and out of securities on a daily or weekly basis. While there are traders who can make a living doing this, I am not smart enough to figure this out and will go as far as to say that its extremely difficult to make money when you compete with the big institutions who have far better resources at hand. But as the time horizon increases — medium and long term investments (again, this is subjective — but for me, medium term is 1-5 yrs and long term is 5+ years) provide more unknowns and no one knows how things progress. This added uncertainty levels the playing field in a way by bringing in more randomness to the world.

Sticking your head in sand is not a strategy!

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Do You Love Your Investment Holdings?

Consider your investment portfolio. Do you hold stocks (or other securities) in companies that you love? Do you tend to disregard or ignore articles that highlight the bear case for that investment? If yes, you could setting yourself up for a common pitfall when it comes to investing. Falling in love with an investment is one of the worst things an investor can do for overall returns. As humans, it is in our nature to like/love things that are familiar to us. This is not just applicable to stocks or investments, but for everything in life.

I was recently listening to the Masters in Business podcast with Daniel Kahneman. Daniel Kahneman is a world renowned psychologist, best known for his work on the psychology of judgement and decision-making. Even though he is a psychologist, he is a Nobel prize winner in economics (awarded in 2002). His research explained and shed light on why the investing world falls for the same traps over and over. One of his most cited study is the Prospect Theory, which among other things summarized that humans value gains and losses very differently. Losses have a far more emotional impact than equivalent amount of gains. For e.g., losing $5 has a stronger emotional impact on most people than finding $5. The overall psychological impact is charted as shown below from the Kahneman & Tversky study. As noted, the curve falls faster towards the left than it rises on the right, indicating the overall psychological impact.

prospect-theory

I highly recommend you listen to the podcast, but if you do not have the time or patience, have a listen starting at the 41:45 mark. As Prof. Kahneman explains, the familiarity of ownership makes humans think highly of that entity. In his words, “Almost everything that is familiar….you like better”.

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Interviewing Dividend Diplomats

I reached out to Lanny & Bert from Dividend Diplomats, and wanted to share their knowledge and experience with the readers of Roadmap2Retire. Following is an interview-style Q&A session with Lanny & Bert. Enjoy!

 Q: Tell us about yourselves 

Lanny: I am a kid that was born in Akron Ohio and did not have the fortune of growing up with money. It was always a struggle and every dollar I made always went to something – school, food, saving for a down payment once I was done with education, etc.. This has taught me that hard work,
saving and investing is worth more than words can say, and is the epitome of my being. Also – I’m Italian and l love sports, Cleveland Cavs/Indians and am an avid fitness enthusiast.

Bert: I’m a 27 year old dividend investor born and raised in the Buckeye State. Similar to Lanny, I wasn’t born into wealth and was taught the importance of working/saving money at an early age. Outside of work/blogging/investing research, I am a huge sports and music fan. Couldn’t be happier to see Cleveland snap their title drought the other week and bring home a championship. It was a moment I will never forget in my life! In terms of music, the older the better. I love listening to anything rock, new or old. There are a ton of talented musicians out there!

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Top 4 Lessons Learned Working as an Equity Research Analyst

The following is a guest post from Simply Safe Dividends. 

My name is Brian Bollinger, and I run the website Simply Safe Dividends.

I have enjoyed following Sabeel’s blog since I discovered it last year, and watching his passive income grow has been fun. Needless to say, I was flattered when Sabeel asked if I would be interested in writing a guest post for his blog. As I thought about what to contribute, I figured some of you might be interested in reading about the main lessons I learned during my career in the investment management industry.

Prior to starting Simply Safe Dividends, I was an equity research analyst at a multi-billion dollar investment firm that actively managed a handful of equity mutual funds. My days were spent reading through annual reports, speaking with management teams, studying the drivers of different industries, and discussing investment ideas with my colleagues. I truly enjoyed almost every aspect of the work. Each day brought a new set of information that needed to be analyzed. There was no shortage of learning opportunities and challenges, and it was exciting to impact investment decisions with millions of dollars on the line.

However, something was missing.

The deeper I got into the industry, the more I began to question the value provided by most active managers. My own investment philosophy had also evolved in a way that no longer aligned with the majority of fund managers out there. Perhaps most importantly, I believed that individual investors were being given the short end of the stick in many ways and deserved better access to data, tools, and research rooted in integrity. Ultimately, I decided to voluntarily resign from the investment management industry.

Starting Simply Safe Dividends allowed me to take on the issues identified above and help individual dividend investors save fees, make better informed decisions, and take tangible steps to get closer to their goals. Working on Simply Safe Dividends is a joy, but I wouldn’t be where I am at today if it weren’t for the lessons I learned from my time spent as an equity research analyst.

Let’s take a closer look at my top four takeaways from working in the industry during my career.

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