Finance Be mentally adaptable Careful readers will notice a very important phrase in the discussion above: “most of the time.” Having a process and sticking to it can be a tremendous help during times of volatility. But having a process doesn’t mean that you should rigidly adhere to investment dogma, ignore alternative points of view or simply stick your head in the sand and pretend that everything is just as it used to be, when clearly the world has changed. When the stock market is undergoing a period of volatility, successful investors know they need to couple their discipline with mental flexibility. Or, to paraphrase a famous maxim (usually attributed to one of the world’s most famous economists, John Maynard Keynes): when the facts change, your process probablyneeds to change, too. So, by all means, have an investment process. But seek out alternative points of view as well. Listen to opinions from all sources, and keep your mind open to changing strategic direction when warranted. Look for fundamental changes (economic, political, social) and be prepared for your process to evolve. No, you should never change your mind on a dime − you should change it as a result of a gradual inflow of new information. But, at the very least, you should be open to hearing new perspectives or points of view, and be ready to adapt to the world as it now is. Be resilient It’s a long-accepted fact that even the most successful investors are only successful perhaps 60%-70% of the time. And even the most successful investors of all time − think Warren Buffett, Peter Lynch, George Soros, PremWatsa and similar titans of the financial industry − acknowledge that they make mistakes (sometimes big ones) from time to time. But Buffett and his ilk have an important personality trait that’s often overlooked when it comes to understanding what it takes to be a successful investor: resilience. That is, the ability to pick yourself up, dust yourself off and get back in the game after striking out. They accept that no matter what they do, they won’t be right about their investments 100% of the time. This is not to say that these investment giants aren’t upset when they suffer an investment loss. And yes, they always take great pains to avoid making investment mistakes. But they also understand that being able to accept financial setbacks, acknowledge mistakes and get going again after the occasional loss are fundamental mental skills. Especially in times of volatility. Know thyself Pssssst − wanna know the secret to investment success? It has nothing to do with insider stock tips. Or getting in on the ground floor of promising high-tech IPOs. Or poring through reams and reams of annual reports. Or understanding arcane investment strategies. The secret of investing success is ... you. Your behaviour. Your emotions. Your discipline. Your stomach. So, to mentally prepare yourself for volatile times, turn the focus on you. Understand the limits of your risk tolerance: how much volatility can you accept before your emotions get the better of you? Assess your investment knowledge: are you just a beginner, an expert, or somewhere in-between? Be honest about your strengths and weaknesses: when it comes to finances, what are you really good at? What are you not so good at? And what do you struggle to even understand? Ideally, you should know these things before you start investing. But it’s doubly important to be aware of them now, as external factors and hard-to-predict scenarios can force us to confront decisions for we might otherwise not be prepared. This honest self-assessment is an essential component of protecting ourselves, because it prevents us from getting into situations and investments where we find ourselves over our heads and beyond our capabilities. CSANews | FALL 2020 | 31
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