This week, I want to wrap up our May series on behavioral investing by talking about successful long-term investors’ tried and true behaviors. I find this fascinating, and I’ve studied the temperament of some of the most successful investors out there, like Warren Buffett and Peter Lynch, and found that they all have a lot in common. These commonalities are what I’d like to focus on today.
Warren Buffett is arguably the most successful and famous investor out there but what most people don’t ever think about is that his legendary long-term performance has come with a lot of lousy stock picks and downturns. Why am I telling you this? Not to shatter your image of the “Oracle of Omaha,” as he is known, but to hammer this point home - you can have volatility and bad performance, but the long-term investor outperforms by staying in the market.¹
If you aren't familiar with Peter Lynch's career, another highly successful long-term investor, here’s his story. From 1977 to 1990, Lynch was the portfolio manager of the Fidelity Magellan Fund, which had an unbelievable 29.2% annualized rate of return. Just to illustrate how impressive this performance is, consider that a hypothetical $10,000 investment that earned this return for 13 years would have grown to nearly $280,000. Yep, that’s right.²
Many argue over who was the more successful investor of all time, Buffett or Lynch. To me, that doesn’t matter; what does matter is how they got there. And guess what, they did it the same way, and it all has to do with managing behavior.
Investing Behavior of the Pros
Ignore the day-to-day movement of the stock market.
Not only do the pros avoid getting worked up about market swings, they say they don’t really pay much attention to the markets at all. They know that trade wars, political tensions, economic disturbances, and the like will come and go and that riding these waves by staying invested makes the most sense. Patience is key.
“The stock market is designed to transfer money from the active to the patient.” -Warren Buffett³
Be fearful when other investors get greedy.
This concept is actually one of Buffett’s most well known quotes and what it really means is don’t follow the herd. Being disciplined and rational in the face of panic by short-term less savvy investors goes hand in hand with having the patience to stay invested. These guys get that better than anyone and their long-term performance proves that.
“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” - Peter Lynch⁴
Control your emotions.
What makes great investors is not necssairily how smart or market savvy they are. It’s how disciplined and rational they can be. When it comes to investing, emotions are the driver of success because they keep you from making sudden and risky moves that could keep you from making larger gains over the long-term.
“Our favorite holding period is forever.” - Warren Buffett³
Forget about trying to time the market.
The phrase “it’s time in the market, not timing the market” gets thrown around a lot because it makes a lot of sense. No one, no matter who they are, can tell you what the markets are going to do or how the economy will fare. There is no such thing as a crystal ball for investing. Yet, we are often tempted to get in on waves of buying the next big thing, the stock everyone is talking about, or trying to buy a stock at the right time or sell it at it’s highest price per share. This never works. Why? Because no one knows whats going to happen in the next minute let alone the next ten years. It is an impossible goal. Again, patience and rational discipled decision making is how to avoid losing money. It’s also the right way to maximize returns over the long run.
"I can't recall ever once having seen the name of a market timer on Forbes' annual list of the richest people in the world. If it were truly possible to predict corrections, you'd think somebody would have made billions by doing it." - Peter Lynch⁴
If you are thinking you just heard me talk about the same thing in four different ways, it’s because I have. We often make the idea of financial planning or investing so big and overwhelming in our minds that it can have disastrous effects. The truth is, it’s pretty simple to be a good investor. Manage your emotions. That’s it, that’s the secret sauce.
I know, easier said than done. However, that is why I continually advocate for using an advisor to help you. We can clear things up by honing in on your goals, help you devise a way to achieve those goals, and keep you from getting off track if your emotions get the better of you. Our value is making sure you stay a long-term investor so that you have the opportunity to maximize your portfolios performance.
Have a wonderful week!
P.S. If you enjoyed what you've read here and found it beneficial, we encourage you to share it with your friends and family. I firmly believe that an educated investor is a healthier and more confident investor.
Until next time...
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¹The truth about Warren Buffett's investment track record Yahoo Finance
²How to Invest Like Peter Lynch
³50 Warren Buffett Quotes on Investing, Life & Success | Rule