Three Simple Steps That’ll Make You A Better Investor In 2021

Three Simple Steps That’ll Make You A Better Investor In 2021
Stéphane Renevier, CFA

about 3 years ago4 mins

Mentioned in story

What’s going on here?

There are two types of investors: those who have a plan, and those who don’t. The first sort stick to a pre-planned, measurable, and repeatable investment process. The second jump from one trade to another, quickly abandon balance, and react to – rather than anticipate – market movements. I know which category I’d rather be in…

What does this mean?

"To be a successful investor, you have to have a philosophy and process you believe in and can stick to, even under pressure." So says Howard Marks, one of the most successful hedge fund managers of all time. Here are three lessons for those looking to follow more in Marks’ footsteps next year.

🧙‍♂️ Step 1: Define your philosophy

Do you believe that markets know everything? If not, what’s your edge – how do you plan to anticipate crashes or identify undervalued companies? If you’ve already got some investing experience, look objectively at your performance and ask yourself whether the numbers prove your approach is working, or whether it’s time to try something new instead. Be realistic about your strengths and weaknesses: beating the market is hard, and there’s nothing to be gained from lying to yourself (something I learned the hard way).

📋 Step 2: Define your game plan in advance

Someone once said that every game has a winner – and every winner has a gameplan. Yours should start by clearly setting out the following:

  • What to buy. One of legendary investor Warren Buffett’s top investment tips is to stick to what you know. If you’re a value investor, stick to cheap-looking stocks. If you’re taking a passive approach, avoid rushing out to buy those hot shares everyone’s raving about. What you lose in adrenaline you’ll almost certainly gain in percentage returns.
  • When to buy. The moment you feel the strongest urge to buy is often the very worst time to do so. Successful investors establish in advance what conditions need to be met before they’ll pull the trigger. Whether it’s a technical pattern, a fundamental shift or simply a price target, leave nothing to chance: prudence is handsomely rewarded over time.
  • How much to buy. You need a 400% gain to recover from an 80% loss (100-80 = 20, 20x5 = 100), so limiting the impact of losses is key to long-term success. As a rule of thumb, I suggest not risking more than 5% of your overall portfolio on any one position unless it’s something really special (and even then, don’t bet the farm on it).
  • When to sell. Whether for richer or poorer, I’d recommend using either a price target (with your potential profit target larger than your potential loss) or a “trailing stop”. The latter is a great way to lock in profit, especially when you’re unsure how high an investment (hello bitcoin) could go. Alternatively, ask: “would I buy at this price?”. If the answer’s no, then it’s probably time to give up your position.

✅ Step 3: Respect your rules

Your biggest enemy is generally yourself. When faced with uncertainty, humans tend to use shortcuts to make decisions. Doing these four things should, however, help you stick to the plan:

  • Write down everything from steps 1 & 2, ideally in a flowchart format, print this out and pin it up.
  • Create your own checklist – and check all its boxes before making a new trade.
  • Read up on the most common behavioral biases, including confirmation bias, anchoring, and loss aversion. The Pack linked below will get you started, but don’t stop there: taming the brain’s beasts requires plenty of practice.
  • Document your decisions and learn from your mistakes. Be ruthlessly honest with yourself and constantly identify what parts of your game plan need improvement.

Why should I care?

Even if the markets have been kind to you in 2020, the best time to repair the roof is – as John F. Kennedy put it – when the sun is shining. With a new year on the horizon and (with any luck) a bit of downtime beckoning over the holidays, right now is a great moment to focus on refining your investment process. Think about, for example, what you’d do if stocks crashed 10%, 20% or even 50% in 2021.

There’s no knowing just what 2021 might bring – but if you follow the steps I’ve set out here, more investment success could well be part of it. Good luck, and have a peaceful Christmas.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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