Define Your Investment Success

December 20-26, 1993

Investment Insights
By Charles D. Vaughan

Don’t Let Others Define Your Investment Success for You

You can succeed as an investor. It only takes two things. Sadly, most investors lack both. The first is an understanding of what “success” means. The other is a proven method for achieving it.

Winning as an investor is personal. It doesn’t have to do with “beating the market ” or outdoing professional managers. The best definition I know of success is from philosopher Will James: “Success is the progressive realization of a worthy ideal.” If we break that down we can get some solid insight into what winning is all about.

First, you need a worthy ideal. Most people have a vague notion of this but haven’t bothered to define it. Yours could be something like accumulating enough wealth to educate your children and assuring the continuation of your standard of living even after you retire. To turn this from a dream into a plan, you need to spend time making your desires concrete. What would this mean in dollars and cents? How would you know if you were on track?

That brings us to the second part of James’ definition, progressive realization. As investors we are used to measuring progress in very short intervals. How about the last year vs. the S&P 500? This process becomes almost like a ball game where we judge who won and who lost at the end of some arbitrary period. Progressive realization makes you focus on the really important issue of achieving your long range goal. Rather than worry about who you beat, concentrate on not beating yourself and on making measurable progress toward your worthy ideal.

Success is a process
Winning is an ongoing process. Take your long range plans and project your needs all the way from now to age 90, for example. You can then see what you need to accumulate while you arc working and how you will use it when you aren’t. Then you can lay down a year-by-year track of’ what it will take. Of course, you will need to make periodic adjustments. From there it is just a matter of staying on track. Success isn’t the end product  it is the process.

Having an understanding of what investment success is, you need only apply a proven strategy for achieving it. This is the point at which many investors self-destruct.

The more you read the popular investment media, the more you are likely to encounter the proven strategy “du jour.” If this one doesn’t work out, don’t worry… there will be a new and improved one in the next issue.

From my perspective of 33 years as an investment analyst, there are several points of investment policy that are absolutely valid and several others that have a high probability of being valid. If there is one absolute certainly about investing it is this:

Investing isn’t about making money, it’s about managing risk.

If it were the other way around, you would merely tell the markets what rate of return you want and wait to get it. Investment markets are highly competitive. There is a risk for every reward and “free lunches” are very expensive. This brings us to the two cardinal rules of investing:

Don’t lose your money
Cardinal Rule No. I is, “Don’t lose your money!” This isn’t a joke. People lose money in two ways. First, they accept more risk than they should. Second, they forget about inflation and lose by default. In the short run, the investor’s biggest risk is market volatility (or the risk of having to sell at a low point). In the long run, inflation (loss of purchasing power) is the biggest concern. Over very long periods, fixed income investing is a guaranteed losing strategy. The only proven method for balancing the short term risk of excess volatility against the long term risk of inflation is diversification among different types of investments. This used to be called portfolio balance; now it is known as asset allocation.

Don’t lose your money, Part 2
Cardinal Rule No. 2 is, “Don’t forget Rule No. 1.” The difference between winners and losers in sports is mostly discipline. The same is true with investors. To succeed as an investor you need to have a written game plan. This is the No. I device for keeping you on track and out of trouble. The purpose of a written investment policy statement is to make you think through what is really important and to remind you not to forget Rule No. 1.

In summary, success isn’t an accident that happens to some and bypasses others. It is a process that you can choose to adopt or not. It begins with your conscious decision to focus on a worthy long range ideal. Next you should seek out investment managers (or mutual funds) with long term records of performance consistent with your goals. Do your part by meeting your target for required annual savings. From there it is mostly a matter of putting on blinders to stay focused by shutting out short term distractions. Then you will be able to compare your annual progress with your predetermined targets.

You will know that you are succeeding because you will see the progressive realization of your own worthy ideal.


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