Why you need a system
Having a system is important because it guides you to follow successful habits, until eventually, you make successful decisions intuitively.
Too often people start out in business or investing without systems, and this leaves them exposed to mistakes and errors.
There’s an old rule of engineering that says if something can go wrong it eventually will.
The same line of thought can be applied to your investment strategy.
As such, you need a system to protect yourself in all markets.
A consistent routine of good habits will set you up in the best possible stead for a successful life, and investing is no different.
Avoid gut feel and hunches
Think about this statement:
‘I always decide to buy and sell my stocks by gut feeling because I think my emotional state is critical to my success as an investor.’
If you don’t agree with this statement, then you must have a system of some sort.
If you don’t have a system, on the other hand, then we’re afraid to tell you, this is effectively the way you invest!
Buffett’s sidekick Charlie Munger says that although investing is simple it is not easy, and if you think it is, then you are stupid (no offence intended, we’re sure!).
Having a system can help to make you less stupid in the markets.
Which system of thinking do you think works best in the markets?
Source: Daniel Kahnemann
What is systematic investing?
Systematic investing is where you have developed a rational process that contains ground rules and signals for buying and selling stocks.
Systematic investing is important because its primary aim is to assist you in your decision-making process.
That is, avoid using your gut instincts.
We can pick an inexperienced investor from an experienced one simply by determining whether they have a system.
Most inexperienced investors buy and sell based upon hunches.
Yes, they’ll make money sometimes, but usually, they lose or underperform overall because they let emotions such as greed and fear dominate their decision-making.
Experienced investors may appear to make snap decisions intuitively, but that’s most likely because they’ve followed their system for so long they instinctively know what to do.
Success in investing over time is more about process than outcome.
A good process will not mean all your investments are winners.
After all, every investment involves a mixture of skill and luck.
You can’t control luck, but you can control your skill and your process.
Sticking to the system
Now simply announcing to the world that you have developed a set of buy and sell rules does not make you a systematic investor.
But sticking to it does!
When you find yourself itching to buy or sell an investment, go back to your system.
Does it comply?
Or are you making your decision based on a fear or greed type basis?
Are other investors influencing you?
Developing a repeatable system takes time.
You will likely go through phases where you favour one approach over another, especially when your ‘system’ appears to be not working.
Nothing makes you question your system like having a bad run!
It’s amazing how suddenly you might think technical analysis or fundamental investing could be the answer.
If you think deeply about your approach and develop your own system, then investing will become easier because you will not be ruled by emotions.
Actioning a systematic approach
It’s really all about the process.
If you have a flawed process, then you are simply bound to repeat your mistakes.
You would be surprised though to understand that it is usually the last thing we choose to inspect when a decision ‘goes against us’.
It’s natural to look externally for blame rather than internally.
And in some cases, it will be an external issue, that results are a failure, not your internal process.
But if the process is right, then you will win more than you lose.
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