Readers of Economy & Markets should know the importance of investment systems. There are several benefits of a well-defined, data-driven, and rules-based investment strategy.
For one, it removes the emotional component of decision-making process (and, at the same time, capitalizes on the inefficiencies created by other investors’ emotional decisions). But, you can also test and validate its effectiveness based on historical data. And it allows for a depth and breadth of data processing that would otherwise be impossible if a human analyst were to do it on a manual, or discretionary, basis.
While it pays to take a detached, scientific approach to investing, it is absolutely not an exact science. Given the role that human emotions play, it’s probably closer to a social science like psychology than to a hard science like chemistry or physics.
That’s why it’s always important to have a little wiggle room when with investing. Structure trading so that being “mostly right” is good enough.
We should be asking ourselves, “what kinds of strategies can we implement that will work in any market, bull or bear?”
In the age of volatility, you need to be confident that your investing strategy will handle the unexpected.
And perhaps most importantly, do not let emotions cloud judgment and override your investing strategy. Emotions will betray you every time!
The most successful traders are those that either have a super-human ability to control their emotions (which is exceptionally rare) or they simply take their emotions out of the equation altogether.
Investors are emotional beings. And with that comes all the trappings of wishful thinking and great expectations. Basically, we’re hard-wired to buy into the hype… the hope… for pots of gold, which sit, waiting to be discovered, just around the corner.
Reality, of course, tends to unfold a bit differently than our rosiest expectations. Often, it’s the seemingly “sure bet” that goes bust… and the “long shot” that, quietly, comes to fruition.
Drowning Out the Noise of Investing
While many market trends are rather steady and predictable (i.e. Coca-Cola’s revenue growth), others are volatile and wildly unpredictable.
So, conventional wisdom says that information is good. The more the better. But, when it comes to investing, the Dent Research team doesn’t agree.
The simple act of analyzing an issue, or problem, gives people the feeling that they’ve done something to address the issue or problem – even if they’ve done nothing more than lie in bed with their iPad and read about it.
For some, more information makes them feel smarter and more skillful at trading foreign currency markets, which are notoriously news-driven.
That may have worked for some. But, I’m convinced that the average retail investor does worse with their investments the more they read the news.
That should be troubling, because we’re drowning in information today.
The trouble is, having access to more information is not the same thing as knowing the best thing to do with that information.
In fact, in many instances, having more information can make decisions and action more difficult. We either can’t separate the important information from the “noise”… or we’re exposed to too many views and alternatives, making it tough to choose which is best.
Worse, nowadays, we can’t even be sure we can trust the sources we get our news and information from.
But we’ve got to overcome the hurdles by using a process that you can live with – and use to sift through or cut out the choices, not to mention the noise in places like the financial media, or elsewhere.
What is the best tool against the endless inundation of information? Yes, having a sound investing strategy.
Investors often lose sight of the goal of investing. It is about earning superior returns and growing one’s wealth. If you like a cause but the stock should be sold, then sell the position and use some of your profits to buy a bumper sticker.
Pay attention to the details… all of the details.
When your investment approach calls for buying, then buy. When it signals a sell, sell.
Too often we get lazy in our investments. Sometimes, when things haven’t gone our way, instead of reviewing the investment selection process to verify that we’re using the right one, we simply stop following the investing strategy.
That leaves us with the worst of both worlds – a strategy we don’t trust and no defined goals for what we own. Sometimes we lose focus simply because nothing has happened in recent weeks. Our attention drifts. We get distracted by life or by the news of the day.
Whatever the reason, if you’ve strayed from your investment strategy, or find it too overwhelming to follow, now is the time to redouble your efforts and get back on track. The exact moment you find yourself off course is the time to take corrective action.
Among all the noise and volatility in the markets, the Dent Research team has been working for years to address the issues that come with investing. And you can read all about the strategies we recommend… and the ones we don’t in Economy and Markets.