I’m often asked what I mean by the words “More Thoughtful Investing” that encircle my logo on TedKerr.com, which is great because it’s a conversation worth having for anyone who aims on becoming a serious investor.
At a high level, I use the term to differentiate between investing and speculating. Speculating, as most people know, is really nothing more than gambling. It’s devoid of any serious fundamental analysis driven chiefly by greed or the fear of missing out. Investing is thought to be a more serious approach to generating returns on your money on the surface. However, I submit that if you don’t fully understand what you own, how it makes money and why it’s priced the way it is, and the other fundamentals that drive a company, it’s bordering on speculation. That’s the difference between investing and thoughtful investing.
Thoughtful Investing Focuses on What is Knowable
Thoughtful investors look at owning stocks as owning a portion of a business. Their expectation is, if they’ve done their due diligence and selected the right company, they will hold those shares for a long time. It could take ten years for a company to execute its business plan and compound its growth. In the meantime, they expect to share in the company’s earnings, either through stock appreciation or dividends, or both. Thoughtful investors also apply a price discipline to capture low-risk opportunities that lead to long-term outperformance.
Thoughtful investing starts with focusing only on what’s knowable and ignoring everything else because it’s not essential. We rely on in-depth research and analysis to know the key fundamentals that drive a company’s long-term performance. For example, we know that when a company sells its products, it uses the revenue to pay its bills and keeps a portion as profit. We know that profits sustained over time benefit shareholders through increasing dividends, share buybacks, or share price appreciation. That is what’s knowable and important.
It’s when investors act on what they don’t know that gets them in trouble. For example, last year, many investors expected the worst as the economy slid into a recession leading to a steep market decline, so they abandoned their strategies. They couldn’t know that the economy would quickly start to recover, prompting an astonishing turnaround in stocks. In terms of their long-term objectives, last year’s events weren’t knowable, which means they weren’t important. Had they stuck with their strategies, the record plunge in the stock market would have shown up as a tiny, momentary blip on their long-term investment performance.
You Can’t Be Thoughtful Without a Strategy
In taking a closer look, what you’re likely to find is most of those investors who fled the market didn’t have a strategy—a customized investment plan developed around their objectives and risk profile. A strategy that is developed and executed thoughtfully provides investors with the confidence and conviction needed to weather the storm. Strategies that include investing in high-quality stocks, tax-loss harvesting, and rebalancing as necessary are generally resilient, as is the stock market, which has consistently rewarded patient and disciplined investors.
There’s no single strategy that is right for everyone. Many of the most successful investors have become billionaires deploying very different investment approaches. The most important thing is to understand and have conviction in your approach. I recommend you go deep and not wide because it’s more complicated to manage a broad portfolio of stocks. By going deep, you can learn more about your approach and gain more conviction. Then commit to your strategy and give yourself permission to say, “I’m going to be ignorant about everything else because those things don’t matter to me.”
