Short cuts are great when you’re cutting across the park to get to your favourite coffee shop 5 minutes faster, but in multi-asset investing, taking short cuts are one of the seven deadly sins.
Sin #4: Sloth
We’re all at some point tempted by the idea of a “get rich quick!” scheme. We want success, and we want it now. We try to tell ourselves that it’s ambition, but really this is sloth… laziness. The surest way of succeeding as a value investor is to keep a wide berth of short cuts. To stay vigilant and be patient.
Nobel Laureate, William Sharpe, insists that there are no short cuts to those big breaks which we all chase. Impatience causes us to make hasty investment decisions, which leads to an increase in risk. There are no guarantees to investing in the stock market, there's only the level of certainty that research, experience and patience offers.
Luckily, there are four easy steps that ensure you don’t succumb to short cuts
1. Be a contrarian investor
2. Take your time – do research
4 Steps to Long-Term Investment
1. Be a Contrarian Investor
Investors talk and share their opinions quite freely. There’s no shortage of information. But most advice is untrustworthy, and that’s why you need to be careful. Build a network of stable connections in order to be able to receive information that you could trust, and then judge this against your findings. Don't follow the herd. Take a contrarian approach to investing by identifying the unloved stocks in the market.
2.Take Your Time to Do Research
Now that you understand which are potential investment opportunities, take time to do your due diligence.
The key is not to rush the research. Many investors will assess a company’s yield to make an investment decision, but the yield should really be measured against other more sensitive items. Do a fundamental analysis of a business first. Think about the health of the industry that the company is in, the economic moat of the business and its track record over the long-term. Doing the grunt work enables you to be comfortable in your investment decisions.
Diversification is key to value investing. It can protect you against “herd mentality” and market fluctuations. If you get caught up in a market rush and your portfolio is diversified, it won’t hurt you as much. This means that instead of bowing out early, you’ll be able to withstand falling equities and crashes, allowing you to remain in the investments you’ve committed to for the long-term.
Don’t be scared by fluctuations in the market, but trust your decision and rest easy that you've made a good long-term investment despite short-term fluctuations. If you back out of your investment too quickly, all your consideration and research flies out of the window meaninglessly. Wait until the stock price reaches your target exit point, and then move on. The only time you should consider selling your equities, before reaching your target exit point, is if the fundamentals of the business change for the worse.
I'll end with the wise words of the world’s most popular investor, Warren Buffett: “Only buy something that you’d be perfectly happy to hold if the market shuts down for 10 years” because the worst “risk comes from not knowing what you are doing”.
To catch up on all of the seven deadly sins of multi-asset investing, click here.