Everyone has the brain power to make money in stocks. Not everyone has the stomach.
Having the stomach for investing means that you are able to get over the behavioral biases that are based on emotions and fast thinking. It means being able to follow-through with an investment plan without emotions. Meir Statman, a finance professor who has focused on behavioral biases, states, “Deeply buried fears can keep us from taking risk – keeping us safe, perhaps but also robbing us of potential returns. A stronger tendency to regret past choices can keep us from repeating blunders, but also from repeating sound strategies that simply didn’t work out the first time.” from Spencer Jakab, Heads I Win, Tails I Win. Those who have regret have no stomach. Investors who can move beyond regret have the stomach for investing.
There are reasons for why all sports teams have set plays and repeat these same plays over and over in practice. It is not about brainpower, but rather having the ability to follow a plan when things are either going right or wrong. There are rules, structure, discipline, and repetition that can all help to offset the fears from uncertainty. You don’t have to be a tough guy or the smartest investment guy, just a disciplined individual who can enter or bail at the right time.
Good plans have to be robust enough to handle all situations and surprises. You don’t have to always be right. Most good investors don’t worry about the percentage of winning trades, but you do have to have plans for minimizing the pain of losses. We have often dwelled on these topics for the simple reasons that they are very relevant. Charlie Ellis has called investing a “loser’s game” because success is all about making the fewest mistakes. The easiest mistakes to correct are those that involve bad behavior. They are in our control if we have the stomach to stay disciplined.
Image: Phil Noto