One of the biggest challenges that investors are faced with is the sheer volume of information that can steer them off course. The point illustrated in this month’s Look At It This Way article is that – when sorting through this information – a patient, long-term approach is the best path to success.
A key tactic in staying disciplined as an investor is developing the skill to separate short-term ephemera from long-term trends. A sharp drop in the market today, however disconcerting, is not important if your horizon is years away.
Highlighting the benefit of resisting the knee-jerk response to news is Warren Buffett, who once famously said that the most important quality for an investor is not intellect but temperament.
He’s undoubtedly right. There are plenty of smart people in the investing world. But often the key difference between the successful and unsuccessful are not smarts, but patience.
Look at it this way. Most TV news bulletins conclude with two features — the finance report and the weather report. Both involve a person standing in front of a chart, describing what happened in the markets or meteorological conditions that day and what might happen tomorrow.
For sure, the weather is an interesting talking point in social situations. But we know longer-term that what counts is the climate and that this changes more gradually.
Likewise, what happened on the market today or yesterday is interesting. But if your horizon is 10 years or more it is unlikely to be as significant a factor as to how you allocate your assets, how diversified you are, and, most of all, how disciplined you can remain.
As investors, we spend a lot of time looking at the financial equivalent of weather reports, agonising over passing showers, and ignoring the long-term shifts in the investing climate.
In other words, our focus on today’s events reveals a tension between how we experience the passing of time day-to-day – through news and weather and market movements – and how time gradually shapes us and our investments in the long-term.
The difference between the two is in our temperament.
Look At It This Way is a series of monthly articles where we demystify the complexities of investing through illustrative metaphors. Take a look at the previous entries: