Anyone who has ever said that investing is easy is either a liar, a fool, or both.
Investing is not easy at all.
If you believe that investing is easy, then you have already lost.
However, if you approach investing with respect and treat it as a lifelong marathon, then you can win at it.
Nowadays, everyone has access to an abundance of market data, yet despite this wealth of information, investors consistently fail to beat the market.
This underperformance comes from a failure to understand that wealth doesn’t come from complex trading but rather from a few simple, underrated investing habits.
So I decided to quickly go through 7 of what I believe are the most underrated investing habits that all investors who want to beat the market must develop.
1. Patience
Everyone knows that Warren Buffett is the most successful investor of all time. When asked why hasn’t anyone copied him, he replied that:
“My approach is a get-rich-slowly scheme, and people don’t like those”
People who want to get rich fast always end up broke fast.
Long-term patience in investing has the highest dividend yield.
Patience is the foundation of all successful investing strategies. Without patience, investors abandon their strategies before compound interest takes effect.
Research finds investors who hold stocks for many years beat short-term traders by about 3% per year.
If you think that 3% per year doesn’t matter, think again.
Scenario A: $500 per month contribution for 40 years compounding at 9% annually.
The end result is $2.1M, with $1.9M of that being gains and $240K contributions.
Yes, you read that correctly, by investing just $500 a month for 40 years, a person could become a millionaire by the time they retire. This is completely achievable.
Scenario B: $500 per month contribution for 40 years, compounding at 6% annually.
The end result is $950K, after the same $240K in contributions.
So the person in scenario B lost over $1M in today’s money.
Warren Buffett says the market moves money from impatient people to patient ones. And in this example, you see how that works.
2. Automate Your Investments
The second habit aims to reduce the consequences of your decision-making.
Automation protects investors from their own procrastination, fear, and hesitation.
When people must actively choose to transfer money into an investment account, they find excuses to skip it.
They claim the market looks too high, there is nothing worth buying, and maybe I skip it this month. Let me wait for stocks to get cheaper.
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” Peter Lynch
The problem is that nobody knows what the market will do tomorrow, next month, or next year, especially the experts.
By automating your investments, you can bypass these behavioral roadblocks. This is exactly what dollar-cost averaging is for.
Under this method, you would invest a fixed amount of money, let’s say 15% of your salary every month. You would do this at regular intervals, regardless of whether the market goes up or down.
Dollar-Cost Averaging: Overview and Why It Works | The Motley Fool
When prices are high, the fixed monthly dollar amount buys fewer shares.
However, when prices drop 10%, the same dollar amount buys more shares.
This way, over long periods of time, your average purchase price will be lower than if you had tried to time the market.
This is because nobody can time the market perfectly. It is highly unlikely that you will find the bottom. It is more likely that you will miss significant upswings and buy in later at a higher average price.
Build discipline by investing on a schedule.
Set up automatic transfers to your investment accounts on your salary day.
Pick a % that you are comfortable investing after taking into account your bills, let’s say 10-20% of your salary.
Find 5 stocks that you have researched and understand the business, growth prospects, and valuation. If your investment app allows it, set up automatic purchases of these 5 stocks each month, splitting the money equally.
Reevaluate your stocks regularly.
3. Increase Investments, Not Spending
When people earn more money, they immediately begin to spend more money.
They buy a nicer car, move into a larger house, and eat at more expensive restaurants.
This is called lifestyle inflation.
People should put the majority of income increases into their portfolio instead of increasing their spending.
I know that this is difficult. People have a bias, as they value immediate rewards much higher than future rewards. Asking a person to cut their current spending to invest more money for the future triggers an immediate psychological reaction. You worked hard last year and deserve that $20K vacation to Bali.
Many people treat their bonus differently than their salary, viewing it as free money meant for luxury spending rather than capital meant for wealth creation.
But you need to get over this bias and think of it as paying your own bonus in 20 years.
Nobody is saying that you can’t go to Bali, but you don’t have to go all out and spend all your bonus.
$10K invested for 20 years at a 9% per year return will be worth $56K in 20 years.
So if you don’t waste all your bonus, you could have $56K when you get older.
If you get a 15% net salary increase, you should allocate at least half of that towards your investment account, instead of increasing your lifestyle. Increase the size of your regular deposits.
Investing $500 per month for 20 years at 9% interest will create a $319K portfolio, while $700 will create a $447K portfolio. That’s a difference of $128K.
Surely, you can spend $200 less per month to have $128K in 20 years?
4. Keep an Investing Journal
Investors repeat the same mistakes again and again and again for years because nobody’s memory is perfect.
People judge their decisions based on the outcome rather than the quality of the information available at the time.
An investing journal forces you to have some accountability for your actions.
This is one of the biggest reasons why I started my Substack.
When you are writing down your thought process and decision-making steps, you realise that sometimes they don’t make sense.
It’s one thing to buy an electric vehicle battery company in 2020 because you think an electric vehicle revolution is coming.
It is completely another thing to research that company and write some arguments for making such a purchase. If more people had done the math in 2020 to calculate what needs to happen for these electric vehicle companies to become profitable, they would not have invested in them.
Write down why you buy or sell each stock and what you think will happen.
For example, before buying, note your reasons such as growth, new products, geographic expansion, valuation, etc., and by when you expect that to happen. Review your notes as new information comes in.
This forces you to clarify your decisions and emotions.
Most importantly, it creates a record of your mistakes, letting you revisit your thoughts later and improve your decision-making process.
You own mistakes is the best education you can get, do not waste them.
5. Read Less News, More Analysis
Don’t forget that the media exists to generate attention, clicks, and advertising revenues.
The media do not care if you lose money after panic selling or euphoric buying.
All the news does is ring alarm bells about the economy, oil prices, the Iran War, and market volatility.
This is why investors must ignore short-term market news and focus more on the fundamental analysis of businesses.
Long-term investors value a stock based on the present value of expected future cash flow. If markets operated strictly on such assumptions, stock prices would only move when the actual long-term cash flow expectations of the company changed.
Yet, stock prices swing wildly from day to day and month to month, while the actual cash generated by the businesses remains unchanged.
When investors look at financial news daily, they experience an overwhelming urge to do something. People just can’t sit around and do nothing. So they sell their stocks during the Iran War sell-off or buy SpaceX at 200x sales. Well, many stocks that sold off after the Iran War began have recovered, while SpaceX fell by over 40% from its post-IPO peak.
The news blasts narratives that cause investors to panic, and then they sell or buy when they should just do nothing.
Instead, spend time learning about company fundamentals!
Read financial statements, go through earnings presentations, listen to an earnings call, analyse industry trends, read a Substack deep-dive, and create your own valuation model.
Simply put, spend more time analysing your investments, instead of listening to the news.
In the long term, stock returns are driven by earnings growth, not by what Jim Cramer said yesterday.
6. Have a Benchmark
Well, how do you know if your investments are doing well?
You might feel happy that your portfolio grew by 9% last year, because that is the long-term average return of the S&P 500. However, that is the long-term average.
That means that there are years when the index returns are weak, and there are years when the index returns are supreme. So you can’t compare your yearly returns against the long-term average.
Maybe the S&P 500 grew 15% last year, meaning that your 9% return significantly underperformed the index.
That’s not necessarily a disaster, as nobody, even Warren Buffett, can beat the index each year. You just need to analyse the causes. If you are confident in your holdings, and the underperformance was driven by market mood, not deteriorating business fundamentals, then there is no reason to change strategy. There is a chance that your current holdings will outperform the index next year.
However, if the S&P 500 fell by 2% last year, that means your 9% return significantly outperformed the index.
Without a benchmark, investors have no idea if their strategy actually works.
A person making a 9% return feels like a genius until they realize the overall market returned 15% during the exact same period. Meanwhile, a person being disappointed after a 9% gain when the market lost 2% is at risk of making unnecessary portfolio changes.
So track your returns over time and compare your gains against the S&P 500 index returns.
In the above image, we see a graph from Portseido that compares the performance of the Global Equity Portfolio to the S&P500 if invested in the index at the same time as I bought the stocks.
I have been using Portseido to track the performance of the Global Equity Portfolio for some time now. They are an investment performance tracking and visualization platform that is extremely easy to use. I especially like their smart benchmarking graphs and tables you can see in the picture above.
This is exactly what I was looking for, and I would recommend them to everyone looking to approach investing seriously and beat the market in the long term.
7. Think in Years, Not Quarters
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” Warren Buffett
The industry operates on a 90-day cycle, with investors obsessing over quarterly earnings reports and Wall Street analyst upgrades.
A person who wishes to be a successful long-term investor to beat the index must have a multi-year mindset.
Short-term thinking to terrible decisions.
In April of 2022, Bill Ackman famously panicked and sold Netflix for a huge $400M loss.
This was after the company lost just 200K subscribers in Q1 2022. This was simply panic selling, and an investor of Ackman’s caliber and experience should have known that. He was too focused on short-term thinking. It was clear that the subscriber loss was driven by the end of COVID lockdowns. There was a lot of pull-forward demand, so people were cancelling the subscriptions to focus on outdoor activities.
This was not the start of a long-term trend, and we all know what happened after that. Growth returned to Netflix, and the stock jumped 600% in 2 years, with Ackman literally timing the bottom.
When a stock drops 20% in a few months, the short-term investor sells everything to stop the bleeding. The long-term investor ignores the drop because they understand the business and have done the math.
Don’t obsess over quarterly earnings reports or short-term market swings, instead, evaluate companies by long-term trends.
Consider what a business will look like in 5 or 10 years.
Even if a stock dips for a few months, don’t abandon it if fundamentals stay strong.
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