In this series, we’ve asked Covestor managers: “What is the single most important lesson you’ve learned about being a successful investor, and how do you try to apply that today?”
Author: Leif Eriksen
Covestor models: Performance with Protection and Global Growth Brands
Just over 20 years ago I came across a quote from an investor named Sir John Templeton. He was the founder of a family of mutual funds called the Templeton Funds (now part of Franklin Templeton Investments). Templeton was quoted as saying (I paraphrase):
The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
I’ve read many books on investing and tried many theories on the market over the years but Templeton’s words of wisdom, above all others, have stood the test of time. They have been a key part of my investment strategy, together with many other lessons I’ve learned and knowledge I’ve acquired over time.
Early in life I didn’t always have new money to put in the market and my focus was on managing a career that took me around the world. Yet, through all my career and location moves, my interest in the markets has been steady. Investing has always been my primary avocation – an avocation I take very seriously.
Investing is never easy and, ironically, it becomes harder in a mature bull market. I find it easier to know when the market is close to Templeton’s point of maximum pessimism than it is to determine proximity to the point of maximum optimism.
There is no formula for it. I do follow some technical market watchers, including James Stack (Investech), to help me identify inflection points. And I favor erring on the side of caution. I know all too well how painful it is to lose money, even on paper.
I’ve made my share of investment mistakes over the years, including:
- Reluctance to sell a position because of an unwillingness to acknowledge a bad decision, only to watch it drop or move sideways.
- Dumping a position too early because the market has yet to recognize its virtues, only to watch the market catch up to my thinking.
- Taking profits too early on a position because of fear that it had gotten ahead of itself, only to watch it go substantially higher.
The tendency to make irrational investment decisions can be reduced to two primary emotions – fear and greed. Hubris is also a factor. I’ve found the best way to hold these emotions in check is to first acknowledge they are always in play.
Managing emotions is one of the hardest, if not the hardest, hurdles to overcome on the road to investment success. It is one thing to know the right investment decision to make and quite another to execute on that knowledge. Other lessons I’ve learned over the past 20 years include:
- Only invest in a company whose business you understand (a principle from Peter Lynch).
- The first rule of investing is not to lose (a principle from Warren Buffett).
- Reversion to the mean is the rule in markets (a principle from John Bogle).
I became a Covestor Model Manager on March 9, 2010. As a model manager I’ve continued to apply the same principles and lessons I learned in the past. Investing is never easy, but I believe one can learn from both successes and failures to become proficient at growing and protecting capital. To that end, first and foremost I owe thanks to Sir John Templeton. Investing against the crowd has, and will always be, a key aspect of my investing.
