Steps to Becomeing a More Successful Investor

Why is investing so difficult?  Well, first, the mechanics of investing are really quite simple.  Most of the wealth in the world is created by owning a company.  If you don’t own your own company, then you should own a part of somebody else’s company – or, better yet, parts of 200 companies.  That way, if one of those companies gets into trouble, it won’t have a great impact on you.  Over time, the growth of the companies you own added to the income stream from the profits they share with you provides you with the return you need to create real wealth and maintain your standard of living in the face of long-term inflation.

Before you begin investing you should make sure that you are a long-term investor.  You should also be in a position to withstand any short-term turmoil in the economy.  This means keeping up to a year or two of annual expenses stashed in a money market fund and having your debt under control or, even better, paid off.  By having your financial house in order, you are better prepared to withstand the market’s short-term gyrations and volatility.

So, if the mechanics are so simple, why is it so difficult for investors to grow their investments?  It’s because their emotions get in the way.  As humans, we are all hard-wired to avoid losses and preserve what we have.  Unfortunately, in today’s computer-controlled, internet-connected world, there is more volatility and no way for an investor to know when to sell ahead of market declines.  Worse, there is no way to know when to buy back the investments ahead of the market rise.  Most individual investors then must be consistently correct on both the sell and the buy - over and over.  This is impossible to do on a long-term basis.

And all of that trading is so unnecessary.  Those 200 companies that you own are going to go up over time, on average, because they have to.  If they don’t, those companies won’t be able to raise new funds for expansion and will be put out of business.

So why do our emotions get in the way of successful investing?  Simple fear and greed.  Fear that the disaster of the day is different than anytime in the past (it isn’t), and greed in our desire to not miss out on the opportunity to make money when everyone else is.  Next month we’ll talk about ways to keep your emotions in check and become a more successful investor.