Contrary to the fast-paced, crazy action of the investing world often portrayed in movies and shows, responsible investing is actually a methodical, systematic process that should ultimately become ‘boring’.
Now that’s not to say that it should become an unenjoyable activity, there is plenty of fun to be had with new analysis and research. The ‘boring’ aspect refers to a rules-based system of determining which investments are worthy of your money and which ones are not. Ideally, choosing an investment should be a process-driven, information-based, clear decision based on a known set of criteria, not an emotionally-charged gut feeling from a rumor overheard at work.
Objectivity is the name of the game. There are still qualitative aspects that must be observed, such as the style and acceptance of the management team, which cannot be totally quantified. However, all factors can be viewed in an objective, factual manner. When you allow sentiment and subjectivity to cloud your judgement, it leads to poor decision making. Following the popular sentiment leads to buying at tops (from FOMO) and selling at bottoms (cutting losses for tomorrow’s doomsday). There are countless examples of this type of behavior, where the media is screaming one thing and the exact opposite ends up happening. As much as possible, remove the influence of the media’s sensationalism and instead focus on fact-based reporting, such as reported numbers, official statements, and objective analyses from other investment firms. Even investors with the toughest resolve can get sucked into the hype or fear when they are constantly bombarded by it; I know I have before, and it will likely happen again.
Developing the rules to govern your portfolio is probably the most difficult part of investing. You must first figure out your investment style, and then find the right combination of measurable stats to judge potential investments. These stats should ensure that you are comfortable with the investment and that it is a quality investment rather than something you may be inadvertently chasing based on sentiment, therefore providing a better chance of successfully meeting your investment goals. This is not a one-and-done process, as the market is continually changing and there are always new factors and types of information being brought to light.
I have been developing my rules for many years now; my investment style has changed over the course of my career as I learned more about the mechanics of investing. I have begun to settle on a strategy that I am comfortable with: long term dividend growth investing as a large core, with a smaller portion of my funds going towards more speculative strategies to capture the high growth opportunities.
Once rules have been set, investors can see past the hype and fear being thrown around, and instead use the clarity of logic and reason to monitor the markets for any investment that meet the criteria. Before making any purchases, there is one more step of preparation: what is the exit strategy? Going into an investment without a clear plan can be very risky – what happens if the stock drops by 50% tomorrow? What happens if it rises by 100% tomorrow? Not having a plan objectively set in place ahead of time can lead to emotions calling the shots and poor decision making in the heat of the moment. These exit strategies can vary across your portfolio, and really should, since no two investments are the same.
For example, some core dividend growth holdings will only be sold if the dividends are cut or predetermined key fundamental ratios deteriorate to specified level for more than two quarters. Other speculative growth holdings will be sold once they reach a certain level of price appreciation. One caveat is that your exit strategy is allowed to change, as long as it is done logically, for good reasons, and not too often. If you have held a stock for 5 years, chances are the market and the world are not the same as they were when you made that exit plan. If conditions have changed, such that the exit strategy no longer makes sense, then modify it accordingly to keep in line with the investment objectives. Having a plan, and being able to hold yourself accountable to that plan, is an essential part of investing success.
Once you reach the point that finding, observing, selling, and (most importantly) profiting from investments becomes a boring, calculated, and process-driven task, then you will have likely achieved great success with it, and that in itself is what makes investing exciting.