What does it take to invest successfully?
An old saying says that I’d rather be lucky than good. In investments, that seems to go without saying. After all, the investment world seems a mystery to most people, with obscure terms like beta and residuals, and advisors sporting strange credentials and letters after their names. Above all floats the specter of total loss, where investors fear to get help because of the risk an advisor may turn out to be like Bernie Madoff, and make off with their hard-earned cash.
But investment isn’t about luck. Famously, the Wall Street Journal ran a dart-throwing contest where they had some pros pick stocks and compared their six-month performance with random selections. After 142 contests, it turns out that the experts beat a dartboard 60% of the time. But this could have happened for any number of reasons—the experts could have chosen riskier stocks, the publicity of the experts’ picks could have affected the stock price, and so on. And it says nothing about whether those stocks were appropriate for various investors.
Because investors have varying goals: some need more income; some want their money to grow; some are trying to keep it safe; still others need to structure their finances to reduce their tax burden. There are as many different investment goals as there are investors. The most important skill any investor can bring to the markets is not the knowledge of obscure Greek terms and accounting tricks, but understanding him or herself: what are their hopes and fears, what are their income and liquidity needs; what kind of legal and ethical framework they want to use.
Self-knowledge is the first step towards successful investing. It’s been said that if you don’t know where you’re going, any road will take you there. But any road won’t get you where you need to go.