Successful Investment Journey
By Derek Polcyn, CFA, FRM, CIM, M.A. (Econ.)
InvestWELLFinancial.com
February 2006


1. Getting Started
Successful investing is a journey, and not a one-time event. You need to prepare yourself as if you were going on a long trip. What is your destination? How long will it take you to get there? What resources will you need for the trip? Define your destination and plan your investment journey accordingly.

2. Know What Works
Read books or take an investment course that deals with modern finance. The people who came up with theories of portfolio optimization, diversification, and market efficiency received their Noble prizes for good reason. Investing is a combination of science (financial fundamentals) and art (qualitative factors). Science is a solid starting base and should not be ignored

Once you know what works in the market, you can come up with simple rules that work for you. For example, Warren Buffett is one of the most successful investors ever. His simple rule is this "If I cannot understand it, I will not invest in it". It has served him well. He avoided the upturn and subsequent devastating downturn of the high-tech bubble of 2000.

3. Know Yourself
Nobody knows you and your situation as well as you. Therefore, you may be the most qualified person (with a bit of help) to do your own investing. Identify the personality traits that can assist you or prevent you from investing successfully and manage them accordingly.

A very useful behavioral model that helps investors to understand themselves was developed by Bailard, Biehl & Kaiser (see the BB&K model in Figure 1).

Figure 1.

Source: Bailard, Biehl & Kaiser

The model classifies investors according to two personality traits: the method of action (careful or impetuous) and level of confidence (confident or anxious). Based on these personality traits, the BB&K model divides investors into 5 groups:

1. Individualist: careful, confident and often takes a do-it-yourself approach
2. Adventurer: volatile, entrepreneurial and strong-willed
3. Celebrity: follower of the latest investment fad
4. Guardian: highly risk averse and wealth preserver
5. Straight arrow: shares the characteristics of all the above equally

Not surprisingly, the best investment results tend to be realized by an Individualist, one who exhibits analytical behaviour, confidence and has a good eye for value. However, if you determine that your personality traits resemble an Adventurer, you can still achieve investment success if you adjust your strategy accordingly (e.g., you should manage your core assets in a systematic and disciplined way).

4. Know Your Friends and Enemies
Your friends may be reliable investment books, reputable media as well as investment professionals with experience, long-term perspective and integrity. However, be aware of "false friends" who only pretend to be on your side (e.g. some investment professionals whose interests are in conflict with yours). You must also remember that you are competing with large financial institutions that have more resources, including greater and faster access to information.

Your worst enemy can potentially be you. Depending on your personality, strategy and particular circumstances, you may be sabotaging your own success. Be honest with yourself ‚ identify and modify factors that are preventing you from investing successfully.

5. Find the Right Path
Your level of knowledge, personality and resources should determine the path that you choose.

Generally, investors adopt one of the following strategies:

A) Diversify ‚ that is, donít put all your eggs in one basket
B) Put all your eggs in one basket, but watch your basket carefully
C) Combination of A (core passive portfolio) + B (tactical bets)

Most successful investors have started with low-risk diversified portfolios and gradually learnt by doing.

6. Be Disciplined
Sticking with the optimal long-term strategy may not be the most exciting. However, your chances of success increase if you stay the course without letting your emotions, or "false friends" get the upper hand.

7. Be Willing to Learn
The market is hard to predict but one thing is certain: it will be volatile. Learning to be a successful investor is a gradual process and the investment journey is typically long. At times, the market will prove you wrong, acknowledge it and learn from your mistakes. When you succeed, celebrate.

Bon voyage.

Derek Polcyn has been involved in capital markets for over 12 years. He worked as an investment analyst at several large North American financial institutions for over 7 years and taught finance at college. Derek is an investment coach at InvestWELL Financial, a company that is passionate about educating people to be independent and successful investors.