It’s not just market fluctuations that can take investors from rich to poor, the way they manage their emotions and behaviour can also make or break their investing strategies.
Guy Spier, Founder and Managing Partner of Aquamarine Capital, discussed the importance of curtailing your excitement when your investments are doing well.
“As an investor, it’s not intelligence or the ability to analyze companies that’s going to make me a better investor, it’s the ability to dampen my own swings – to dampen my own moves to exuberance,” he said. “At the end of an upswing, people become more and more confident about the positions they own and they double-down on them and buy more. They don’t think to instead diversify. This happens unconsciously.”
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Keep in mind this, too, shall pass
In a presentation via Skype at the Chicago airport as a result of his flight being cancelled, Spier told students in Professor George Athanassakos’ value investing class to keep in mind, especially when your investments are doing well, that those good streaks will eventually come to an end.
“The good times will pass and the bad times will pass. This idea is useful when we’re investing in crises,” he said. “The world usually doesn’t come to an end, which is fine on the down side, but the upside is a lot more difficult to manage. If we want to become great investors, that’s where the rubber hits the road.”
He said in upturns, investors tend to take more risks and buy more shares in companies that are doing well, rather than focusing on companies that are undervalued and have potential to do well in the long term. Ben Graham, an economist and professional investor who is considered the father of value investing, introduced the latter strategy in the aftermath of the Wall Street Crash of 1929 when he began to buy shares in companies at less than their liquidation value (the price of an asset when it is allowed insufficient time to sell on the open market, typically lower than fair market value) and make money from them.
“This was the first time from an investment standpoint that somebody was coming along with a countercyclical (opposite to the general economic trend) approach. He was actually catching asset prices so they don’t fall as much,” said Spier.
He suggested two ways investors can avoid taking risks:
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Get away from the noise – Don’t check stock prices. Don’t watch what other investors are doing. Spier calls these distractions “noise” and said they can influence you to follow the herd.
“Noise gets you to do stuff that other people are doing,” he said.
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Ask others around you to keep tabs on your emotions – and help you keep them in check – When you’re excited because your stocks are going up, how do people around you respond? Do they prompt you to invest in those companies more aggressively? Or do they advise you to take your money off the table? Spier said he ensures he has people around him who will encourage him to slow down and reassess his investments when they are doing well.
“I have to accept that people will get rich faster than me and I have to force myself to de-risk my portfolio,” he said. “De-risking my portfolio means to become more diversified and to move into areas that I know are lower risk.”
