How Your Learning Process Is Intertwined With Your Investment Process

I spent time searching for the answer to this question: Why do the majority of individual investors under perform the market over a 20 & 30 year period?

Forbes article reported these sad facts:

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames.  The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!

I now realise that I’ve been asking the wrong question, as I should been asking: What does the learning process of the individual investor encompass?

“The road to success is not easy or else everyone would be the greatest at what they do—we need to be psychologically prepared to face the unavoidable challenges along our way, and when it comes down to it, the only way to learn how to swim is by getting in the water.”
Josh Waitzkin

In the first 5 years of investing my own money, I thought my returns were mainly due to luck as I had earned 34% annualized returns.

Now, luck is a major contributor in the short term (0 –24 months). But to sustain these returns requires more than luck, over the long term, skill becomes the dominant factor.

And if you are choosing an investment fund, one requirement is a track record of exceeding the market return, of at least 3 years, returns in-excess of the market under a 3 year period should be put down to luck.

I was quite lucky when I started my investment journey, something I wasn’t aware of at the time.

My early schooling experience contributed to my unique ability to cut through complexity, which allows me to focus solely on the essential principles involved in investing.

But I was not a top student, I wouldn’t consider myself in the top half. I struggled through my early schooling years, I was held back a year during primary school.

I received a lot of support from my teachers, they were encouraging, and for which I’m grateful for.

During this time I had to develop, with assistance, a unique learning process that ended up pay dividends for years to come.

I always considered myself average, never smart or intelligent, and my early schooling years certainly contributed to this self-perception.

The small but significant difference that separates the top investors who outperform the market consistently, from the investors who consistently underperform the market, is not their investment techniques or unique investment insights, they certainly contribute to their superior returns, but it comes down their individual learning process.

Investment is more art than science, there are numerous examples of men with formula’s who went on to crash spectacularly throughout history. (Read the book: When Genius Failed: The Rise and Fall of Long-Term Capital Management, by Roger Lowenstein.)

Simply having the mechanical techniques to invest rationally is not the key factor in earning superior returns.

Investing is a lifelong journey, there are two things that bring it to an abrupt end; an absolute loss, or, the investor’s own impatience with the investment process.

Both are intertwined with each other.

Hence, why Warren Buffett says the following: “The first rule is not to lose money, and the second is to observe rule one.”

The vast majority of motivated individual investors, young and old, make terrible mistakes during their investment approaches. They fall frustrated by the wayside while those on the road to success keep steady on their paths.

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