If you listen to any of the world’s leading investors they will tell you that nothing is more important to long-term investment success than a clear investment philosophy. More important than a sound investment strategy? Yes, they will tell you, because strategy, while important, is nothing more than a manifestation of an investment philosophy. Strategy can evolve as circumstances might warrant; however, an investment philosophy is based on the intractable belief you have in the principles and practices that guide your decision-making. In times of market upheaval and through the dark of uncertainty, your investment philosophy enables you to control your emotions, shut out the noise and focus on the things that really matter over the long term.
Too often investors want to focus on the short-term outcome of their decisions when, in reality, it has very little impact on the long-term results of a well-conceived investment strategy. A random 300 point drop in the market in reaction to the news of some calamitous event, while entertaining and maybe a little disconcerting, will be nothing more than a microscopic blip along the way in a long-term time horizon. Your investment philosophy is in place to remind you of that. It can also remind you that short-term results are random and fleeting, which means you have absolutely no control over them.
Instead, your investment philosophy keeps you focused on the process which is your investment strategy. If mistakes are made, you have a rational process for uncovering and learning by them. No panic reactions or second guessing, just a clear assessment of where you are today in relation to where you want to be, and whether the current strategy is the one to get you there. At worst, you adjust the strategy. At best, you leave it alone because it still supports your core beliefs about the market.
Keep it Short, but Pointed
An investment philosophy doesn’t have to be elaborate or eloquent. Most successful investors keep their investment philosophies short and pithy while expressing their core belief. For example, the greatest investor of them all, Warren Buffet has an investment philosophy that consists of just one sentence: “Buy wonderful businesses at a fair price with the intention of holding them forever.” You obviously have to know something about Buffet to know how that translates. Essentially, he believes in buying companies at a price at or near their intrinsic values that can consistently increase their intrinsic values over a long period of time. While many people may not grasp the meaning of his investment philosophy, all that matters is that Buffet does.
A quote by John Bogle, named by Fortune Magazine as one of the Investment Giants of the twentieth century and who is credited with creating the world’s first index fund, has been adopted by many “Bogleheads”(followers of John Bogle) as their investment philosophy:
- Buy-and-hold, long-term, all market-index strategies, implemented at rock bottom cost, are the surest of all routes to the accumulation of wealth.
Other examples of brief but all encompassing philosophy statements:
- Diversify widely, rebalance regularly, minimize costs; rinse, repeat.
- Anything is possible, and the unexpected is inevitable. Proceed accordingly.
- Risk means more things can happen than will happen.
Of course, it does require at least some knowledge of how the markets work and some familiarity with investment principles and practices to develop an enduring investment philosophy. But, more important, it requires a deep understanding of your own values and beliefs about money, as well as sensitivity to your comfort level with risk over a long period of time.