Do Your Beliefs Sabotage Your Portfolio?

IMPORTANT: Please read the disclaimer before continuing.

As an investor, you will have a certain set of beliefs that will define your investment style.

So to find out what makes a successful investor, I started thinking about some beliefs that could either limit or accelerate their ability to grow their portfolio.

With that, I would like to share what I have found, and challenge you to think about your own beliefs as well.

I believe that we need to find our leverage point in life. Not to be mistaken with financial leverage – we are not talking about borrowing money here. We are talking about a method that allows us to achieve more by spending lesser effort.

“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world. ”
― Archimedes

1. Do You Believe In Having Leverage?

Leverage can happen in various forms such as being born in a well-to-do family or being well-connected. It makes life easier.

What about investing? Isn’t it a widely known but not understood leverage?

When you are investing…

1) You are investing in people’s ambition with your money and not your time. You are free to do what you do and you get a free ride on the superior capability of others. Your position is that of a sidecar.

Imagine investing in Sam Walton, Elon Musk, Steve Jobs or Jeff Bezos. What would your returns be like? There is nothing you can do that will make them work harder or lesser for you. They are driven by their own missions.

That is why you just need to pick the right guy and be a beneficiary of their management of the company. As another example, think of people who rode on the coattails of Warren Buffett. Their lives are transformed by life-changing returns.

2) You are making money with your mind, not your time. It’s true that you may have to spend more time analysing companies earlier.

As time goes by, you will spend lesser time performing the same task of analysing companies because you are familiar with the investment process. It does not matter if you’re investing 100k or 200k of your portfolio because the same amount of due diligence is required.

Similarly, over time, your mind will get sharper and be able to connect the dots faster as well. As that happens, you will have an effect of applying the same (or lesser) effort and producing a bigger result. With experience and time, you are able to spot opportunities instinctively.

In short, the knowledge and experiences you have in your mind will be more important than the hours of work you commit.

The point where I am going to build my wealth from 100k to 200k, then from 200k to 400k, and so on until hitting a million. And a million going on two million and so on, the journey gets easier and not harder.

(RELATED: Forget about ROI, What’s Your Return on Time Invested?)

Compare this to your own careers… You are always expected to do more when you get a promotion. Granted, as you get more proficient, things may be easier but you’ll be stuck in your job positions if you want to be comfortable.

For stock investing, you are able to spend lesser efforts YET generate more return. It’s a unique set-up which isn’t very common in other wealth-building strategies.

“If you’re leveraged with capital then good decisions have a much larger earning impact than hard work.”

Naval

2. Do You Believe In Knowing What You Can Control?

I believe that it is extremely important for us to know what we can control and what we cannot control. Once we recognise that, we need to play at our highest level.

A level where we have absolute control in the stock market.

I’ll give you an example:

Kenny and Warren are good drivers. They are challenging each other to see who reaches the endpoint first. The endpoint is 300km away from their starting point.

For Kenny, he wants to wait for the perfect weather and the perfect road conditions before he starts driving. This means the sun cannot be too hot otherwise it will be glaring to his eyes. This means the road cannot be wet or have any uneven surface. He is afraid that he might get into an accident.

For Warren, he understands that he has no control over the road conditions. Warren does not believe he has superpowers to predict anything that might happen but he is mentally prepared to navigate the road to the best of his abilities. He just drives and makes progress every day.

My question is… who will eventually reach to his final destination?

The answer is pretty obvious, isn’t it?

Let’s bring back this analogy to a similar example of investors.

Too many investors are waiting for the perfect market conditions before they start investing.

Some of us may put out a blanket statement to say the stock market is overvalued, hence, it seemed like a convenient justification to avoid searching for good companies. Instead of thinking of the context of the stock market, I think of the context of businesses. There are bound to be good opportunities — even in today’s environment.

See, the thing is there will never be a day where it’s all sunshine and beautiful blue skies for investors.

If you are wishing for the perfect day to start investing, forget about it.

The day will never come. There is bad news every day. But you have to ask yourself whether it has direct implications on the businesses you own.

We have to understand we have no control over the daily news cycle and whatnot. But we have control over our behaviour, emotional stability, research capabilities and valuation discipline.

Similarly, just like Warren, one should never try to time the market. Instead, one should think ahead, worry less about the short term movements and focus on the earnings as the ultimate determinant for long term performance. You will eventually outperform others who time the market.

Success in the stock market is a combination of our knowledge, our behavior, understand what we can control and we cannot. Then, we should allocate time towards outcomes within our control.

3. Do You Believe in Exposing the Wrong Beliefs?

There are some conventional beliefs among investors such as:
1. This stock is too high, you cannot buy it. But it’s high compared to what?
2. To be successful in the stock market, you need to be VERY active in the stock market. Who said this is true?
3. When we invest in an overseas company, it is riskier. Is it really riskier?
4. This company is backed by the government, it cannot fail. How sure are you?
5. High growth companies are risky. Ironically, they could be the safest because they are increasing its intrinsic value very quickly.

These are beliefs that harm investors. That is why I want to debunk a few of them today, the others will be covered in future posts:

1. “When you hold a stock for a long time, you are going to make more money”

A lot of investors feel that when it comes to investing, the length of the holding period is going to affect your returns. While that may be true, it’s just the half-truth. If you buy a lousy and hold for the long term, you are not going to generate any meaningful returns.

There are no medals and glory for holding any stock for long periods of time. The long holding period is being rewarded only when the company is performing well.

Also, to get financial gains, there isn’t a fixed period you have to hold. It all boils down to earnings report and their corporate developments such as inking a new partnership or opening a new sales office.

Lastly, a stock that goes 20% up within 6 months may not be “superior” as compared to a stock that goes nowhere within 12 months. This shows that we are just fixated on very short term targets and we ignore what truly drives the share price in the long term. The hardest thing to do is to ignore the share price and focus on the fundamentals.

Formula
↑ Stocks returns = ↑ holding period + ↑ growth in earnings/cash flow
Stock returns =/= holding period

(RELATED: 5 Investing Myths That Will Destroy Your Portfolio Growth)

2. “Taking profits once it makes 100%. Take back our original capital and let the rest to run.”

Imagine you’ve invested $1,000 and the share price goes up by 100%, your original $1,000 would turn into $2,000.

Scenario A ($2,000 profit)

If you trim it by 50%, you’re taking $1,000 out from the $2,000 position. Effectively, you are taking back your original capital.

What if the share price goes up by another 100%? Since you took out $1,000, you are left with $1,000. And that $1,000 turned to $2,000.

Scenario B ($3,000 profit)

But what if you did not trim? Your first original $1,000 would have become $4,000.

Is this good or bad? When we are applying this rule blindly, we are taking on a very mechanical approach towards investing which is bad. While that sounds good and logical, you could be selling away your future gains. It could be a costly mistake.

Sometimes, when the business grows by 100%, the investment thesis gets even clearer because it shows the management is able to execute well and capture the market opportunity. The key is to evaluate the company’s growth trajectory and valuations. In some cases, it makes sense for you to hold, and even average up on your initial position.

If everything goes well and you double your money, do nothing. If the company makes sense and it is a fair value, continue to average up. Only sell when the earnings disappoint or it gets extremely overvalued.

If we keep taking profits consistently, it’s very hard to become financially free. You should let your winners run continuously. Buffett doesn’t take profits once he doubles his money.

Besides, once you take profits, what are you going to do with your money? Can you find a better company than the one which you’ve sold?

If you feel a strong need to take profits on every occasion you make a profit, it shows a lack of conviction in the company or you might not know why you’re investing in the company in the first place. You should sell your shares away instead.

Many of us feel that our unrealised gains in the stock markets is not real money. Trust me, it’s real.

You don’t have to take profits to know it’s real. You have to feel comfortable with volatility because that’s how it is. Volatility is a norm in the stock market, not the exception. Instead, stay vested and ride on the growth of these amazing companies.

Conclusion

• Investing is often a reflection of who you are and it exposes your biggest emotions. Investing is an activity of self-control and self-awareness.
• Investing also forces us to take on a long term approach in all things. The wealth-building process simply cannot be rushed.
• You want to have a sustainable method that is repeatable.
• All of us need some form of leverage in our life to get ahead faster. For wealth-building, it’s mastering stocks.