What Is Zen Investing?

Introduction

I have spent a lifetime studying the stock market. There are things that I know for sure, and there are many more things that I don’t. One thing I know for sure is that bear markets are part of the game. All investors dread bear markets, but very few know what to do about them.

I have developed a methodology that answers the question, “How likely is it that a new bear market is coming sometime within the next 12 months?” My clients absolutely love this service. It has spared them lots of pain and suffering by informing them about the likelihood of trouble ahead. The thing is, my methodology isn’t rocket science. It’s just basic probability theory, applied to the stock market in real time. And it works.

Leaving money on the table

Roughly 90% of us will fall short of our potential as investors. By that I mean we will leave money on the table, money that could and should be available to us when we need it most. College assistance for the kids; down payment on that dream home; retiring with confidence that we won’t outlive our money.

But instead, too much of our potential investment profit ends up in the accounts of others. And I’m not talking about a small amount of money here. By the time we’re ready to stop working and start living off of our accumulated savings, most of us will have left 50% or more of our potential wealth on the table. The other 50% will be distributed among a long list of other actors – to the financial intermediaries who get between us and the market, and to other investors who have more time, better skills, and a carefully crafted strategy.

As pessimistic as that may sound, there is also plenty of good news. With a surprisingly small amount time and effort up front, anyone can learn the skills and come up with a strategy that will put you into the top 10% of investors who have mastered the investing game. Skilled investors benefit from the mistakes of unskilled investors. It’s surprisingly easy to learn the right skills.

If you are unsure about how to handle market declines, this article is for you.

This article is for those of you who are tired of hearing the same old crappy advice, and frustrated by the lousy investment returns you’ve been getting. You know that you can do better at this, but you’re not sure how to go about it, or who you can turn to for help. Maybe you have a financial adviser who never seems to have enough time for you. Or maybe you decided to go DIY and manage your own money. You’ve tried different investing websites, newsletters, and trading systems but none of them seem to work for you – at least not with any consistency.

All you really want is honest advice, practical information, and a little guidance about how to turn things around. You want to find out what you’ve been doing wrong, so you don’t have to keep repeating the same old pattern: you have a few good months in a row, and you start to think that maybe you’ve finally figured it out. But then you hit a rough patch in the market that wipes out half (or more) of your recent gains in just a few weeks.

It’s understandable that you don’t trust the financial advice industry. So what can you do about this situation? Finding answers to that question is the focus of this book. I will show you how you can beat 90% of all investors – including professionals (the so-called smart money) – without even breaking a sweat. (O.K. maybe a little sweat, but only in the beginning, while you’re putting together your game plan. I call this the Front Loading phase of investing.)

The 3 Keys – Financial Literacy, Investment Policy, and Bias

If you want to understand why 90% of us fall short of our potential as investors, look no further than the Big Three Keys. Financial literacy is the ability to understand three ideas: compound interest, the link between risk and return, and basic probability theory. If that sounds daunting to you, rest assured that it’s much easier that you think. These are ideas that can be understood and mastered by anyone who cares to put forth a little time and effort to learn them. You don’t have to know algebra, statistics, or calculus. All that’s required to master these three concepts is some simple arithmetic, common sense, and logic.

Investment policy just is a fancy term for coming up with a plan and committing it to writing. Your plan (investment policy) will include things like:

  • Your investment philosophy
  • Your primary and secondary investment goals
  • Your need, ability, and willingness to take investment risk
  • Your overall investment strategy
  • Your specific strategies for dealing with risk, uncertainty, and hostile market conditions
  • Your tactical approach to implementing and maintaining your strategies
  • Your trading rules and parameters
  • Your checklists that will keep you on the straight and narrow
  • Your benchmarks that will allow you to track your progress
  • Your monitoring and rebalancing regime
  • Your specific strategies for dealing with risk, uncertainty, and hostile market conditions
  • Your tactical approach to implementing and maintaining your strategies
  • Your trading rules and parameters
  • Your checklists that will keep you on the straight and narrow
  • Your benchmarks that will allow you to track your progress
  • Your monitoring and rebalancing regime

How will you approach the challenge of mastering the art and science of investing? Writing a great investment policy will get you halfway there. It’s a rigorous process, and it can take anywhere from 10 to 30 hours of research and reflection to do it right. This is the Front Loading part of the process.

Once your investment policy is hammered out, it doesn’t take much effort to maintain it. If done right, your plan will mostly take care of itself, with occasional tweaking along the way. As your life circumstances change over time, you’ll revisit your plan and make the necessary adjustments. But your plan is stable. It will be your guiding light, your operator’s manual, and your reality check as you move through your investing lifetime.

Behavior is the third key to investment mastery. It’s based on a field of study called Behavioral Economics. When it comes to making investment decisions, we are not 100% rational all of the time. We use shortcuts in order to make the thousands of small decisions we face every day. These shortcuts are extremely useful, but they’re loaded with cognitive and emotional biases, false assumptions, and distorted beliefs. We all have them, and we can never completely eliminate them.

But what we can do is recognize that we have them, and make allowances for these harmful tendencies by including them in our investment policy. We do this by setting up rules, checklists, and alerts to keep us on track with our plan. Think of it as a very effective way to stay out of trouble. It isn’t foolproof, but it will reduce the number of mental or emotional errors we will make – the errors that cause us to leave money on the table.

Is investing an art, a science, or a Bloodsport?

Investing is a full-contact, no-holds barred competition between two types of investors: the smart money and the dumb money. For the smart money, it’s like shooting fish in a barrel. For the dumb money, it’s impossibly complicated and deeply frustrating. Professional traders dominate the market, and when you make a trade, there’s usually a professional taking the other side.
Investing is often described as a financial bloodsport. A bloodsport is an organized, competitive event that involves aggression and violence, to the point where blood gets spilled. Dog fighting, professional boxing, and mixed martial arts are common examples. These events are staged for two reasons: entertainment and profit. Only the most experienced and savvy promoters are able to effectively combine both.

Bloodsports are popular because they offer an opportunity to gamble. Men love to gamble. In ancient Rome, watching gladiators getting mauled by lions and heavily armored soldiers was considered mainstream entertainment. Lots of money was won and lost by betting on how long it would take for the gladiator to fall. And when it comes to the arena of modern investing, the gladiator getting mauled is often you.

What is Zen Investing?

Zen Investing is a holistic approach to making sound decisions under stressful market conditions. It’s designed to help investors understand how the investing game is played, what the cognitive and emotional traps are that lead to decision errors, and how to create an organized game plan that will bring all the important stuff together in one place.

If you want to up your game by learning the essential skills that elite investors have, consider becoming a member of the ZenInvestor Community.

About the Author

Former head of equity trading, Northern Trust Bank, Chicago. Teacher, trainer, mentor, market historian, and perpetual student of all things related to the stock market and excellence in investing.

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