I’m always on the lookout for new ways to teach investors how to achieve long-term success, and I recently came across a very interesting six-minute TED Talk video on the topic of “grit.”
I thought to myself: Aha! Maybe this is a key point.
The speaker is Angela Lee Duckworth, a psychology professor at the University of Pennsylvania who specializes in the concept of grit.
Duckworth identified grit as a key difference between success and failure among cadets at West Point Military Academy, teachers in tough neighborhoods, salespeople of all sorts, and contestants in a national spelling bee.
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The most reliable predictor of who would succeed and who would not came down to passion, perseverance, and stamina, she said.
These ideas and insights are terrific for many parts of life. But I don’t think this is really what investors need.
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Successful investing does not require constant hard work, lots of practice or triumphing over competitors. If anything, after you have implemented a good plan, it requires being passive: doing next to nothing and letting your plan play out over years or decades.
Jack Bogle, founder and longtime CEO of The Vanguard Group, once advised investors to turn a bit of common wisdom on its head: “Don’t do something; just stand there.”
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Here’s what he meant: If you have a good long-term strategy, trying to micromanage it will almost certainly be counterproductive.
This flies in the face of our deep cultural value that success comes to those who work harder, putting in extra time and effort. But if you’ve got a suitable investment plan, that extra effort may make you want to find a better fund, a better adviser, even a better plan.
You could join the many investors who constantly search the financial news hoping for insight into future trends and possible hot stocks.
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The problem is that in today’s world, information moves so easily and quickly, and greed is so rampant, that I can just about guarantee that before you learn about it, any low-risk and high-return investment will have already attracted many millions (if not billions) of dollars, driving up the price you would pay — and decreasing your potential profits.
So, if investors don’t need grit, what do they really need?
A big part of the answer is in the final chapter of a book that Richard Buck and I wrote a decade ago called Financial Fitness Forever.
The chapter is called “The Perfect Investor.” We wrote it because in the long run, what investors bring to the table is more important than the popular yet frustrating quest for “the perfect stock” or “the perfect fund” or “the perfect manager.”
Our discussion in that chapter was based on two weeks of interviews we did with all the financial advisers at Merriman Wealth Management (the company’ current name), where we both worked and from which we are now both retired.
Collectively, these advisers had spent tens of thousands of hours working with investors. We asked them what characteristics separated their most successful clients from their least successful ones.
The most successful investors weren’t necessarily those with the most money or the flashiest jobs. Some “secrets of success” quickly emerged, and it turned out they weren’t secrets at all.
It came down to two things: Habits and attitudes.
As we wrote, much of what we heard again and again “sounded like a description of attitudes and habits that contribute to success in life in general.
“The ‘perfect investor,’ if such a person really exists, is somebody who plans for the future and is patient and deliberate in carrying out those plans.”
Our attitudes shape our behavior almost automatically when we aren’t watching. Here are four that our advisers identified:
· Trust in the future. This gives us confidence that someday we’ll have a safe place to land despite today’s turbulence.
· Resilience. Long-term investors repeatedly face setbacks, and resilience lets them pick themselves up and keep going. As Winston Churchill famously said many times: “No matter what, never give up.”
· Perspective. This trait helps us know the difference between what’s really important and what just seems important at the moment.
· Patience. The most successful investors know time is their ally. They can wait for results. The least successful investors are often upset, impatient or elated, as the case may be, by whatever’s happening at the moment.
While attitudes shape our thinking, habits govern our behavior, letting us move through life without having to think about the same issue again and again.
Successful investors are in the habit of saving regularly and automatically. In our roundtable discussions, every adviser identified this as absolutely essential to long-term success.
The best investors habitually find ways to delay gratification and live below their means. Some make it a point of pride to demonstrate they can live on less and still be happy.
The best investors acknowledge that they experience fear and greed, but they don’t let those emotions govern what they do. They are the ones likely to be following Jack Bogle’s advice: “Don’t do something; just stand there.”
Can you do all these things and get everything right? Maybe. Mostly, your habits and attitudes are in your control.
However, the best investors don’t expect or demand perfection. Pure perfection exists only in textbooks. We are fallible human beings, living in an imperfect world.
So give yourself a bit of slack. I haven’t lived my life perfectly, and you won’t live yours perfectly either.
If you do your best to do your best, and keep putting yourself back in the game, in the long run you’ll be the best investor that you can be.
I don’t know how it gets better than that.
For more on perfection, check out my latest podcast, “The Perfect Investor.”
Richard Buck contributed to this article.