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Don’t lose your head…

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We are in the middle of one of the biggest market ‘corrections’ seen in recent years. On 24th August the UK markets saw their biggest single points drop in its history, with almost £74bn wiped off companies value.

This is the first ‘big market event’ that I’ve directly experienced whilst working in this industry. As the underlying economics are still a little confusing, I’m sure it’s the same for many of you who read the blog.

So I’ve written my ‘layman’ view on what I’ve observed among our clients and brokers. Not from the perspective of explaining the reasons the events, but from a behavioural, psychological and ‘success principles’ one.

Whilst it appears many are losing their mind, others are quietly taking these events in their stride and capitalising on opportunities.

What seperates these two different reactions in people? That’s what I focus on here.

 Markets always tell a story 


Whilst these numbers above are almost meaningless to the individual investor, they do tell a story.

They tell us that there is fear in the markets.

When the markets operate from fear their volatility increases as professional investors and institutions scramble to maintain their liquidity or even solvency. Many private investors are doing the same.

But is this the right thing to do? Is now the time to be making rash decisions? Or if the horse has already bolted, how can you mitigate this risk in the future?

 You Absolutely Must Have a Plan 

It appears to me that the majority of investors in the world never escape the realms of average or ordinary. I don’t mean in terms of ability, because there are certainly some very capable private investors with plenty of knowledge.

I’m referring more to their level of financial success and rate of growth. You see most investors have only actually planned to ‘invest in the markets’, with only a basic understanding of their goals and objectives, and an even lower appreciation of a strategy that will get them there.

As the age old saying goes:

If you fail to plan, you plan to fail.”

The fact of the matter is that any private investor who sets off on a course without a clear idea of where they are going has, by default, not planned at all. Likewise, those that have a plan they don’t stick to or don’t regularly measure themselves against are also doomed to remain dwelling amongst the ranks of average.

This applies to all meaningful life pursuits.

Consider business, career, fitness/health, skill development/learning for example. Would you approach improving yourself in these areas without a plan? Perhaps you would, though I’d suggest you’re less likely to realise your goals without one.

That’s because we humans work by striving towards a specific goal. In order to achieve this we work best by following a logical, measurable and targeted strategy. This limits distraction, informs us of progress and gives us a benchmark to measure our success. Those that spend time up front creating a solid plan will always get the best results in the fastest time.

There are of course a few exceptions, but they are restricted to people who are either naturally talented or just plain lucky. Sometimes it can be a combination of the two.

 Don’t bank on being special 

In reality, however, these examples are the ‘Outliers’. They are much rarer than you realise. We hear ‘success’ stories of people who achieve huge gains in the markets on nothing more than ‘gut feel’ or ‘getting in at the start of something’ – a trend, company growth, industry change for example – and believe this is normal.

It’s similar to the ‘overnight success’ stories you hear about people or businesses. We love to focus on the positive, the ‘big wins’, and the media loves to talk about these as it sells the news. Think Facebook, Uber, Instagram or Air B&B. Huge success, grow and profit in a relatively short timeframe.

 Are you a Unicorn, a Thoroughbred or a Pack Horse? 

It makes us think that, like investing, building a ‘Billion Dollar Business’ is easy. Like investing, it’s not. These are often referred to as ‘Unicorns’. They’re mythical, things of fantasy and dreams. Yes, they do happen, so unlike an actual Unicorn, they do exist.

But despite the amount we hear about these rapid growth businesses, they are incredibly rare. For every ‘Unicorn’ business, there are thousands of ‘Pack Horses’ that either just plod along, or die in the field.

In contrast, there are other businesses that start up with a planned and well developed strategy for their operations, sales, marketing, finance and product development. These businesses make slow but consistent progress, improving along the way. They gradually add capacity, staff, products etc. as they learn about their customers, industry and themselves. Perhaps these businesses will never be a ‘Unicorn’, but they become a ‘Race Horse’ that wins races more often than they lose.

Investing is the same.

Many investors chase the dream of massive returns in a short time frame, turning £100 into £1 million in 6 months. No doubt sellers of ‘systems’ and the emergence of spread betting that allows you to start with a small starting bank has contributed to this. Yes, there are stories of this happening, but don’t pin your hopes on the exception. You’d be better off playing the lottery.

 The unexpected is expected 

I’ve seen among our clients that those investors that take a strategic approach to their investing are more likely to end up as the ‘Race Horse’. They start with a well-considered strategy with a single focus, clearly define their objectives and have a realistic timeframe to achieve them. They are appropriately capitalised, properly diversified and don’t deviate from their plan no matter what happens in the markets. They also seek advice from specialists, understanding that nothing in the markets is gospel, using this advice as a check point, sanity check or a starting point for their own research.

If you took the time to study the background of the most successful investors in the world you will consistently see two things: hard work and a plan. If you haven’t already, I’d really recommend you read Market Wizards by Jack Schwager, which profiles many examples of these.

You will see that even among the ones who, at first glance, just seem to have ‘got lucky’ there is always a story of planning, grit and discipline behind them. Many of the ‘less-talented successes’ in the world today, whether they are investors or businesses, got there by hard work, a plan, persistence and the discipline to follow it.

They use this plan, which they create outside the emotional arena of the markets, as a way in which to regulate these very emotions that can derail an otherwise great strategy. They follow it. They have built in rules to follow in the face of volatility or market ‘crashes’. They know that the ‘unexpected is expected’ because they have seen it before, just in different clothes.

So when events like those we have seen in August 2015 happen, they aren’t all ‘Chicken Little’ in their reactions. They’re measured, confident, controlled and able to capitalise on the opportunities these events present, rather than join the ranks of those running away scared.

 It’s your choice 

What is your plan for your investing? Where do you want to be by the end of this year, in three years, ten years, thirty years or even beyond your own time on this earth?

Have you got a clear, written down plan of how you are going to achieve this? You almost certainly won’t get there without this. With this plan ready with clear daily, weekly, monthly or annual actions that you need to follow to get you to your target; you just need to take action, follow the plan and don’t get distracted by events.

Markets will always be volatile, events will happen that are ‘unexpected’ and others will panic.

But just imagine what it would be like if you have a plan to inform you what to do during such times. Imagine that you can confidently sit back and watch everyone else lose their heads with a quiet satisfaction that you don’t have to join them, and that this period of time is just one of the ‘speed bumps’ along your investment journey.

It may slow you down, but doesn’t stop you from reaching your destination.

So if you haven’t got one already, start to create an investment plan for yourself TODAY.

Be a Thoroughbred; don’t die in the field of average.

Do you have a plan for your investing? How did you create it? Does it help you during such volatile conditions? Let me know in the comments below. 

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If you’re new to the CSS Investments blog, please make sure you read our introduction post here to find out how this blog will help you become a better informed investor or trader.

Click here to get daily Stock Market updates and news summaries by joining our FREE award winning Stock Market Newsletter.

 


 New Service 

If you are unsure how to create a plan, or what strategy is right for you then we offer a free ‘Strategy Review’ session with one of our professional investment advisors. This is different from our ‘Portfolio Review’ as we don’t look at your existing holdings, instead simply focus on your goals, objectives and consider the best structure that will suit your needs. We then outline your options and suggest a structure that you can use to create your investment plan.

To arrange a Strategy Review:

Call one of our Account Executives on 020 7264 2360

Or email strategyreview@css-investments.com.

There are limited numbers available each week, so there may be a waiting list. The call will take around 30 minutes and there is no obligation to become a client, so no hard sell. Perhaps one day you will join us or refer a friend, that’s up to you. It keeps us on our toes to make sure we give you the best experience and advice possible so that you may consider us in the future.

We do this because we believe an educated investor is good for the industry as a whole, as well as the economy. All improvement and growth starts with individuals. So we will offer to educate anyone who wants to better their financial future through investing in the markets, and to help you to do it the right way.

Comments

  1. Jim Watson says:

    An excellent blog. Unfortunately in my belief many so called advisers don’t understand the markets and use investor’s capital to play the markets. By the way I think you mean Fail to plan, you plan to Fail! not fall.

  2. Adam King says:

    Thanks for your comment Jim. I can’t really offer an opinion on other advisers other than no matter who you’re considering taking said advise from, always do your research on the company and individual. On top ask them questions about the market, see what they know or if they have a particular strength in an area you’re interested in, what their ‘worldview’ on the markets is and whether they follow a strategy or set of principles when building and managing a client portfolio.

    My own understanding of the markets from the last 12 months of being in this industry is now actually very different to before I came in. I thought it was simply about picking the right stocks or companies and the rest will take care of itself. Perhaps a bit naive, but that’s the perception that I found to be common. I now realise that investing is not really about stock picking, it’s about managing risk. You can select the best performing stocks in the market, but if you’re undercapitalised to deal with swings, overleveraged if using vehicles such as CFDs, or don’t have set rules to manage the money you have in the markets, then you are still open to poor performance. I’ve seen examples of long streaks of ‘winning’ stock picks, up to 20 or 30 with consistent smaller gains, only to be wiped out in what appears to be one moment of madness – e.g. something bought on a whim, or not accepting a loss so that it becomes so big the psychology involved makes is so hard to take.

    A good adviser doesn’t just understand the markets, they understand how to manage risk and they understand how to manage a clients emotional or psychological issues. Sometimes the latter is almost impossible as ultimately the client makes the final decision on an advisory account. We as humans don’t always tend to act in a way that is in our own best interest from a logical point of view, as our emotions or ‘monkey’ brain take over.

    That’s why the relationship any investor has with their adviser is crucial. The value is not just in understanding the markets or how to manage risk. It’s about accountability. There has to be mutual respect, and both sides have to have licence to challenge and call each other out when it’s clear that emotions are clouding judgement.

    Oh, and that does say ‘fail’, just the bolding is difficult to tell!

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