William J. Bernstein lists four abilities required of a successful investor in the preface of his Investor’s Manifesto book.
- “They must possess an interest in the process. It is no different from carpentry, gardening, or parenting.”
- “Investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics.”
- “Investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression.”
- Investors need “the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it.”
Bernstein goes on to apply a bit of math by arguing that fewer than 10% of the population can pass muster on each of the above four. That works out to about one person in ten thousand or approximately 35,000 in the United States is equipped to manage their investments.
ITA readers surely are among that 35,000, even if there are weaknesses prevalent within the four requirements. Requirement number four is one I hammer on weekly. The more mechanical the investing model, the easier it is to “stay the course.” The Dual Momentum Model is one of the easiest ways to execute a planned strategy.
Requirement #2 is addressed in the Position Sizing worksheet of the Kipling spreadsheet. In addition, we need to understand the basic ideas surrounding portfolio risk. Most of us have been through the tech bubble of 2002 and the real estate crash or what is now known as the Great Recession of 2008 and early 2009. Those dramatic draw-downs tend to leave financial scars that are not easily removed. And it can easily happen again. Potential market reversals is a point Bernstein makes over and over again. For all we know, we could be at another tipping point. When a market is this high we need to be prepared to take action to preserve capital.
Take heed of Bernstein’s words and strengthen weak areas. Read a few of the Top Ten Investment Books and a good one to lead off is his manifesto book.