Every year around the holidays, I like to write a philosophical piece on investing, just for a change. This year, I thought I’d relate some of the lessons learned from one of my passions. I’m a driving enthusiast. I bought a sports car 4 years ago.I have been participating in occasional track days, often with a professional driving instructor teaching me to get the most out of my car. One interesting fact about taking a serious approach to high performance driving is that, before taking instruction, most of us are indeed very poorly equipped to handle our street cars in high-stress situations.
Driving instruction at a race track teaches you emergency avoidance manoeuvres for the public roads (picture a dog or child running in front of your car), how to slide your car in a controlled manner from an under-steer or over-steer situation (most snowfall accidents happen due to mismanagement of a slide), and how to corner at high speeds (picture a wet or snowy day where you misjudge a corner).
There are a number of similarities between managing risk while pursuing stock market performance vs. managing risk while pursuing driving performance. In track driving, the risk of sliding off of a race track is a fact of driving fast. If you don’t want to take that risk, you must slow down. But there is not much reward to driving slowly when other cars are lapping you on a track – it kills the reason for your being there. Faster lap times are the reward for taking on proportionately more risk. That risk can be controlled through techniques taught through professional driving instruction. I’ve found that there is a close relationship between my adherence to the laws of physics taught by professional driving instructors, and my cars adherence to the track! I’ve also found that the more “feel” one has for their automobile, the more connected one becomes to its control on the race track. Thus, I have always elected to drive fully manual transmission cars with as few electronic interferences as possible.
Similarly, risk is the very nature of the stock market. If you don’t like investment risk, buy a GIC. That’s like going slower on a race track. It’s still investing, but it’s not very rewarding. You buy stocks to reap higher potential rewards. You take on more risk to do so. That risk can be controlled through techniques taught through fundamental and technical analysis techniques (I’ll unashamedly recommend my book Sideways as a great tool for retail investors to learn technical analysis). As with cars, I’ve found that there is a close relationship between an investors adherence to systematic investment techniques – and the performance of one’s portfolio. And, like my observation regarding the connection between you and your car, I believe that the more direct control you have over your portfolio – the more of a feel you have for successful entry and exit timing. You need to be as engaged and aware as possible in your investment decisions to manage your risk/reward potentials.
If you become removed from the investment process through mutual funds and wrap accounts, for example, you can – like driving – lose your connection to the markets. And that can lead to a numbing down of your investment skills – leading into losses when markets change. Just ask the average mutual fund investor how long it took to break even after they numbly rode out the 2008 crash. For this reason, I salute you for studying technical analysis. And I thank you for making SmartBounce part of your learning process. I am humbled by the fact that over 3000 individual investors read this blog regularly! I continue to encourage you to comment on any of my blogs. Please share your thoughts and your questions over the coming year. I read them all.
I wish you and your family well over the holidays, and look forward to providing more ideas and investment musing in 2014.