What do ultra successful investors like Peter Lynch, Warren Buffet, and Jim Rogers all have in common? When I study all truly successful investors, what I’ve found is they all have two strategies in common.
Number one, they all have a system. Here’s the interesting part, no one has the same system. Yet, they’re all successful in their own right. So what’s the secret to their system? They have trust and confidence in their system, especially during the times when it makes them “look stupid.”
Remember the 90’s before the tech bubble popped? Once Warren Buffet was heavily criticized for not owning technology stocks. Some thought he had lost touch with modern times. He was too old and out of touch. And how did Mr. Buffett respond to all that criticism? He ignored it! Because he had trust and confidence in his system even when it made him “look stupid.”
All successful investors know that there is no perfect investment system. That sooner or later whatever system you use will make you look stupid, at least temporarily. The challenge for you as an investor is to stay with your system when things aren’t going as well as you would have liked.
Number two, all successful investors avoid large losses. What all of these gentlemen understand is that the secret to really making money when it comes to investing is to avoid losing large sums of money. You’ve probably heard this before: if you have a 50% loss, then it takes a 100% profit just to break even, to get back to where you used to be.
On the other hand, if you have a 10% loss, it only takes an 11% profit to get back even. So if you want to be a successful investor like Peter Lynch, Warren Buffet or Jim Rogers, make sure that you have an investment system that you have trust and confidence in. Even when it temporarily makes you look stupid. And make sure your investment system avoids large losses.
The buy and hold (or buy and hope) investment method we’ve all heard about (and probably used) just doesn’t work when your goal is to avoid large losses. Just look what happened in the 2000-2002 bear market. Want more proof? Look what happened in the 2008 market meltdown. Truly successful investors also don’t get suckered into the myth of missing the 10 best days (or 20, 30, or 40 best days).
They know it’s more important to miss the (10, 20, 30 or 40) worst days of the market, even if it means missing the best days.
One of the best systems, and the system we use, we simply refer to as supply and demand. It takes the emotion, yours and ours, out of the decision making process and you don’t have to worry about which economist has things right and which ones are going to be wrong. It’s numbers-based and rules-based. Simply put, it helps to determine where demand/strength, is in the market. Which is where you want to put money to work. More importantly, it helps you see where weakness is in the market, where demand is falling and consequently, the areas that you want to avoid.
Let’s imagine you (or your advisor) have determined your ideal investment mix to be 60% stocks and 40% bonds. If demand is stronger for stocks, doesn’t it make more sense to change your mix to say 75% stocks and 25% bonds? And when demand for stocks is weak (remember 2000-2002 and 2008) wouldn’t it be smarter to change your mix to maybe 25% stocks and 75% bonds?
I’ve kept things simple here, to illustrate the concept. You should broaden your investment options to include US stocks, foreign stocks, commodities, REITs, and bonds. All of which can be purchased using low cost index funds or ETFs.
