The great one tells us to "be greedy when others are fearful". But, how exactly?

Economists say humans are rational and emotionless investors. Wrong! Humans are highly emotional, and it hurts our portfolios. The good news is that we can train ourselves to become more levelheaded investors. Take these 3 specific actions…

On December 9, I shared my December 2022 trades. International markets trended up in November. So, at the direction of the Fast Follow Investor (FFI) model, I moved ~50% of my portfolio from cash to international equities. At the time, I was nervous, noting:

My head and my heart tell me this is a precarious time to “get back in”. But the market and the model disagree.
“When it comes time to buy and it’s the right time, you will not want to. When it comes time to sell and it’s the right time, you will not want to.”
Remember: Just like Buy & Hold, Fast Follow trend investing requires fortitude to stick with it.

Warren Buffett has said: “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble.”

I agree. Successful investors remain calm when everyone around them is pulling their hair out. A levelheaded temperament helps them stick to the plan. That sounds great. But how, exactly?

There are three things you can do to develop and exploit a calm, levelheaded temperament:

  1. Develop your “edge” by picking the right investment system and knowing it better than anyone else.
  • Whether in stock selection (Buffett), hedging (Thorpe), real estate investment (any local expert), index funds (Vanguard) or otherwise, choose a system where you know more.
  • Then, exploit that knowledge by betting on yourself.
  • For me, this is Fast Follow Investing.
  1. Control your amount of money invested (bet size) so the particular investment system will never wipe you out, even if a black swan event should occur.
  • Start slow (to go fast) and ramp up your invested savings over time.
  • Bet more when favorable to do so, and less when unfavorable per the Kelly criterion.
  • Always keep some of your wealth in cash or U.S. treasury bills. This establishes a margin of safety, as Buffett recommends.

Once you 1) find your investing edge and improve on it over time, and all the while 2) protect yourself from major losses, you’re halfway there.

The hardest part is to put systems in place to stay levelheaded and focused, despite difficult times:

  1. Finally, turn your positive behaviors into habits. Then, investment decisions (according to your preferred system) become automatic.
  • Tie preferred human behaviors to positive external triggers. E.g., review investments as part of a monthly dinner date with your spouse (no kids!).
  • Make the impact of not sticking to your habit explicitly known. E.g., project how you’d feel if you missed a future opportunity because it would be too difficult to take action now.
  • Establish social support systems to cheer you on in challenging times.

Fortunately, I made that December 1st trade into international equities. As a result, my portfolio is up 5% in two months. Of course, international equities could have gone down, and the FFI model would have adjusted accordingly. Up or down, I am happy I was able to stick with the system that gives me my edge.

I will continue to find and meet these challenges each month…with some months proving more difficult than others.

By reading these posts, you help hold me accountable! Thank you for cheering me on.

Subscribe to get my posts sent to your Inbox. Thanks!

Brian Herriot, Fast Follow Investor @brianh