In today's issue, I want to share a core aspect of my investment philosophy: Winning the game before it even starts. Too many investors focus on getting it right and overlook an important aspect that gets little attention: Being prepared.
Before I buy a stock I prefer to be in a position that already increases the probability of winning. Since that sounds a bit vague, let me give you an example:
The Stanford Marshmallow Experiment
For those who are not familiar with it, here’s a summary of the experiment from Wikipedia:
“In this study, a child was offered a choice between one small but immediate reward, or two small rewards if they waited for a period of time. During this time, the researcher left the child in a room with a single marshmallow for about 15 minutes and then returned. If they did not eat the marshmallow, the reward was either another marshmallow or pretzel stick, depending on the child's preference. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.”
To apply this to the investment industry: Long-term thinking trumps short-term thinking. The urge to take small profits right away is subordinated to the patience to wait for even bigger profits. So far so good. The data is on our side. The longer we hold stocks, the higher the probability we sell them for a profit.
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
- Benjamin Graham
But now comes the big problem that the "experts" overlook: Human error. The marshmallow experiment shows a link between delayed reward and success but leaves it up to the human to decide whether to get the reward or not. And that's where the problem starts.
In theory, we all know it's smarter to forgo the immediate reward. In practice, however, the whole thing looks different. Shortsightedness leads to losses, especially on the stock market. Humans are not robots that always act rationally. And this is where my philosophy enters the chat:
What if we could create conditions in advance that would automatically lead us to act in the right way?
How could the children in the experiment not be tempted to eat the marshmallow right away? So that they wait for the reward with almost 100% certainty.
The Solution: By Not Being Hungry.
If the children have already eaten plenty of food before, they will be more indifferent to the temptation, which would automatically lead to a greater reward because the risk of human error would be considerably lower.
How does this translate to stock investing?
Not being hungry means in our case having money to invest or at least not needing it for a while. In the investment world, the wealthy investor has one major advantage over the little guy: He doesn’t need the market.
The wealthy investor doesn't need the markets, because he already has all the income he needs. And what a difference this makes. He can wait patiently until bargains arrive, letting him actually buy low. He can automatically implement another key strategy that brings success: Long-term investing. He can ignore daily market chit-chat, what the FED does, what “this expert” said, and so on. By not being hungry (having money) he is already in a better position to win the experiment and get the additional marshmallow as a reward.
What about the little guy, the one who’s hungry all the time? He always feels pressured to "make money" now. And in return, he's always pressuring the market to "do something" for him. Which leads to his failure. His success depends on the market and not on him. And, as we know, the market doesn’t care at all. He constantly overpays because he needs to do something now and can’t lean back and wait for bargains to arrive.
“Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant.”
Warren Buffett often gets mocked for his huge cash reserves, especially during market euphoria. When he sees no value, he can wait patiently until value appears because he doesn’t need to do something. And look how this has played out over time for him:
The average investor doesn’t need to be rich in order to succeed in the stock market. All he needs to do is adopt a strict policy of never spending more than he makes, take his extra savings, and compound it in intelligent, income-producing stocks. Then in due time, he can have money coming in daily, weekly, and monthly, just like the rich man. And he could start investing automatically as the rich man does.
This article sums up one pillar of my investing philosophy pretty well. Since I am aware of human error, I try to limit my margin for error in the first place by positioning myself right. The child from the Marshmallow Experiment that has eaten something before has a huge advantage over the child that’s hungry and will eat the marshmallow right away. It’s the same as “fishing in the right pond”, a concept I wrote about in previous articles.
I strictly adhere to the rules that have historically led to success. And not needing the money you invest every day is another simple approach that automatically brings me to the investment behavior that lowers the risk of losses and increases the chances of profits.
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Until the next issue. 👋
Disclaimer: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from my research. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.
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Thanks for the insight!
Not needing market to make you money in short term is really a superpower for investors