My learning process of money management and investment is a common story that many of you can probably relate to.
I started learning how to invest in stocks by using every proven and unproven method available in the market. I attended expensive investment workshops, gobbled up entire libraries of investment texts, and dabbled in options, forex, commodities, properties, and other exotic investment schemes.
I made obscene profits, and went on to lose all of it.
I only started to make consistent investment profits after I discovered an investment truth that few people understand.
Successful investors usually adopt an investment method that is suitable for their personality and not the other way around.
If you study the investment methods of some of the most successful investors in the world, many of them adopt different investment philosophies but they all are able to accumulate a great amount of wealth through investing.
The idea is simple. An aspiring investor should evaluate his personality, his attitude, and his belief system before deciding which investment style is suitable for him, rather than trying to go with whatever advertised methods claim to be able to generate cash in the shortest amount of time.
Intrigued by this idea, I started looking for books that focus on investor behaviors. While most investment books focus on the form of investing, such as formulas, charts, and patterns, few books talk about the behavior of investors.
Books that combine human psychology and financial markets are few and far between and I had to turn to conventional and unconventional texts to learn more about human psychology.
Later, I branched out into other texts that are related to human psychology – from conventional psychology to astrological studies on human behavior.
During the summer of 2011 I was catching up with an old friend of mine, Jonathan Quek, and we were discussing the common traits of successful investors. Jonathan is a much sought after public educator of financial literacy in South East Asia and a certified Neuro Linguistic Practitioner.
I was sharing with him my idea of how investors’ personality traits should influence their investment methods, and he admitted that he was thinking about the same thing and pondering how to share this complicated idea with the public in a “KISS” (Keep Investment Simple and Stupid) format.
Together, we pioneered the idea of the “5 Elements of Successful Investors.”
Four Elements Or Five Elements?
The concept of the 4 elements – Fire, Air, Earth, and Water – dates back thousands of years. Many ancient civilizations and religions used a form of the 4 elements in an attempt to decipher the mystery of the universe. The Greeks, Babylonians, Egyptians, Romans, Indians, and Japanese have used and incorporated the elements into their religions.
Today, the use of 4 elements to interpret the personality of a person is also known as psychological astrology. The father of modern analytical psychology, Carl Jung, made use of psychological astrology to develop his hypothesis. He wrote…
“Astrology represents the sum of all the psychological knowledge of antiquity.”
You can see the evidence of the 4 elements at work in the horoscope section of almost every major newspaper publication, and there is tons of literature in magazines and books that claim to be able to analyze your personality using the horoscope.
The familiar astrology signs (Aries, Capricorn, Cancer, Libra, etc.) are developed from the classification of human personality using the 4 classical elements.
There is, of course, no scientific proof that people behave in a certain manner according to their birth dates and star signs.
And even if they do behave similarly, it could be a result of a self-fulfilling prophecy or just pure coincidence.
Whether or not the art of predicting personality through the elements is accurate is not the subject of this article. What we are interested in is how the ancients observed and categorized personality types into four main groups and twelve zodiac subgroups.
Four thousand years of observing human behaviors can definitely contribute to the accuracy of these observations despite how unscientific the underlying methods may be.
The most important objective that we want to achieve using the 4 elements in analyzing investment behavior is to find out how our personality affects the way we invest, and how to make money profitably over the long term, by controlling the most uncontrollable variable in profitable investing: Our personality.
In Luc Besson’s popular sci-fi movie, The Fifth Element, and in the popular 90s environmentally-themed cartoon series, Captain Planet and the Planeteers, the 5th element is defined as “love.” However, we named our 5th Element, “Spirit.”
The Spirit element examines the common belief and value systems of successful investors, regardless of their personalities and investment methods. In short, it is a set of personality traits that are common to all successful investors.
1) The Fire Element (Risk It All!)
Fast, exciting, and highly profitable are the words associated with people of the Fire element.
They will probably tell you, “If we want to make it, we better make it BIG, or go down burning. At least we tried!”
This is a winner-takes-all mindset that, when applied to the win-lose world of financial markets, seems to be especially apt. Their willingness to take risk transforms many Fire investors into multi-millionaires overnight and then, just as suddenly, their luck runs out and they become bankrupt.
They are not afraid to try out new frontier investments that may be deemed by other elements to be too difficult or precarious. They are the venture capitalists who dare to risk their money and give small enterprises a chance of greatness.
Fire investors provide the money that fuels innovation and makes the world a better place. Although only one out of the hundred companies that Fire investors bet on make it big, that one correct investment can propel their net worth sky high.
Of course, there are also many Fire investors whose ill luck and bad judgment result in their losing everything.
Probably one of the best examples of a Fire investor is Donald Trump. We can see all the benchmarks in him: The guts to cut big deals and big flashy investments, whether they are making money or not. He has also experienced low points and near personal bankruptcy due to impulsive decisions and overleveraging.
However, each time he goes through a crisis, he’s able to learn and become a much shrewder investor, using legal loopholes and his personal brand name to his advantage.
2) The Earth Element (Careful, Methodical, But Sometimes Inflexible)
Earth people are those who are not willing to take too much risk and yet will, more often than not, accumulate a nice comfortable nest egg.
Most of them will not become overnight millionaires by taking big risks, nor are they able to devise new trading methods to exploit opportunities in the markets. Rather, they accumulate wealth by taking careful steps to grow their wealth in a measured, calculated way.
They are meticulous, they are patient, and they probably invented the phrase “long-term investing.” They believe that slow and steady wins the game.
Given the choice of thousands of companies they will probably invest in the most boring stock, ignoring the more exciting – and perhaps riskier – growth and profit potential options.
However, their greatest strength also becomes their greatest weakness. They may run the risk of becoming so confident in their mathematics and research that they become inflexible.
Warren Buffett is a prime example of an Earth investor; his investment philosophy of researching a company, waiting for a cheaper investment opportunity, and then holding the company for a long, long time, is a good example of Earth element strategy.
However Warren Buffett has also been criticized by others for being slow to invest in new opportunities, such as not investing in technology during the dawn of the 21st century. He defended his decision saying, “technology is not something we understand, so we don’t invest in it.”
After spending much time with one of his bridge buddies, Bill Gates, founder of Microsoft, he finally invested in IBM in 2011.
3) The Air Element (Intellectual, Knowledgeable, But Sometimes Lacking Focus)
Air people are dreamy, creative intellectuals who are always on the lookout for something new and interesting.The word “diversification” was probably invented by Air investors.
They diversify their investment holdings, not to lower their risk, but rather to get an idea of how each asset class works as part of their quest to master the art of investing.
They are primarily interested in the mechanics behind the asset classes and are experts in linking one thing to another due to their extensive knowledge about all elements of investing.
They also switch from strategy to strategy, and formula to formula, trying out whatever is available in the market in order to find the magic formula of money making.
Air investors’ biggest weakness is their inability to persist to the very end once they are distracted from their passion. The Air personality tends to be the jack-of-all-trades and is always trying too many things at the same time.
The best advice that Air investors should keep in mind to keep them focused on the task in hand, is the famous quote by Thomas Edison:
“I have not failed. I’ve just found 10,000 ways that won’t work.”
Hungarian born billionaire investor, George Soros, is probably a good example of an Air investor. Soros was an avid student of philosophy since he was a teenager but being a philosopher doesn’t pay well so he subsequently became interested in investing. This gave him an opportunity to test his philosophies of reflexivity and fallibilism in the real world, via the financial markets and he subsequently became one of the most successful investors of our time.
Reading his book “The Alchemist of Finance” is like reading a book on philosophy (difficult and wordy) and many new investors that I recommend this book to often don’t have the patience to finish the book. They often come back to me and ask, “What is George Soros’ formula to success?”
My reply is always, “Study the words, not the numbers.”
4) The Water Element (Not Money-Oriented, But Holds Great Potential)
Traditionally, Water element people do not do well in investing. Money is often the last thing on their minds as they prefer to focus more on human-to-human relationships and the need for emotional nourishment.
They typically prefer to let other people manage money for them and they are happy as long as the returns are decent and they have enough for themselves and the people around them.
Ironically, if they applied their empathy and deep understanding of human emotions to the field of business and investing, they could become great entrepreneurs and investors. As a result of their frequent interaction with other people they are often the first to pinpoint potential market needs.
A good example of a Water investor is Peter Lynch, the famous fund manager of the Fidelity Magellan Fund, one of the few funds in the world that has managed to beat the S&P 500 index over a long period of time.
Peter Lynch is also well-known for his investment philosophy of “local knowledge.” He believes that the average retail investor will not have time to read lengthy financial reports (Earth) or develop complex stock analytical theories (Air) and should, instead, invest in what they are familiar with. Things such as common items they buy from the supermarket or the services that they use in everyday lives.
Lynch believes that retail investors will be able to find great investment opportunities by interacting with the basic function of the business, as opposed to stock analysts who just read reports from their comfortable office in a faraway city.
5) The Spirit Element
The Spirit element describes the common set of values and beliefs that we believe all successful investors have and can be applied consistently across all the 4 elements of investment personalities.
Here are four of the most critical steps…
Develop your own unique investment philosophy
All successful investors have a unique investment philosophy with which they are comfortable. For example, Warren Buffett’s investment philosophy is based on Benjamin Graham’s philosophy of Value Investing. However, he modified and created his own unique philosophy on his journey to becoming a successful investor.
Buffett once said his investment philosophy was characterized 15% by Phil Fisher and 85% by Ben Graham.
Only invest in what you understand
If you can make a lot of money from what you know, why invest your money in what you don’t know? People tend to discount their knowledge and expertise and waste time hunting for “other” investments.
The losing investor does not realize that a deep understanding of what he is doing is an essential prerequisite to success and rarely realizes that profitable opportunities exist within his own area of expertise.
Do your own research
Successful investors do their own research and reach their own conclusions, rather than depending wholly on the recommendations of others. Warren Buffett once said, “I have spent my life looking at companies (annual reports), starting with Abbott Labs and going through to Zenith.”
Pay your dues
Mistakes are painful. More so when it is at the expense of one’s own money. But the pain of losing real money is an essential component to an accumulated learning experience.
Humans learn by pain and pleasure. Successful investors make use of the painful experiences to modify their behavior, break bad money-losing habits, and strengthen their good habits.
Rather than being defeated by investment losses, good investors become more successful as they reflect on their mistakes. Warren Buffett and George Soros may not be who they are today if not for their long and arduous journey of trial and error, and perseverance over a period of 20 years.
To sum up the essence of “The 5 Elements of Successful Investors,” I shall quote from the famous Chinese general and military strategist, Sun Tzu:
“It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and lose one; if you do not know your enemies nor yourself, you will be imperiled in every single battle.
”
”
0 comments:
Post a Comment