May 4, 2020
3 min read
Nicholas Flaherty - Investment Strategist - FWU Invest S.A.
In part 1 we saw that having a clear investment plan was crucial to keeping a clear head in crazy times such as these. This helps considerably, but there is also more we can do to ensure we are best able to cope with this environment. While we should have an investment plan, we should also have an appropriate approach i.e. how we execute this plan.
It means we as investors should be guided by a repeatable process, as opposed to ‘gut feeling’, ‘hot tips’, or even belief in ‘star’ managers. It entails having rules in place, sticking to these rules, and thus staying disciplined. This is why we have designed the investment approach in Forward Quant the way we have: built on a purely quantitative methodology, rule-bound, with a focus solely on the data – not on fancy charts, not on speculating on the latest turn on a particular stock and most importantly not on our own discretion as investment managers. In other words, Forward Quant is all about a rigorous, systematic process.
It helps because it is a more objective investment method, which in turn provides a sense of security in emotional times such as the ones we are currently facing. In fact, going into the market without this type of disciplined approach can be very dangerous to any investor’s wealth – be he or she professional or not. We have seen it time and time again, whereby investors display deep emotional biases that lead to large losses.
‘Hope’ and ‘fear’ are the two main emotional culprits. When you have invested based just on speculation, without a disciplined method, these emotions are likely to consume you. For example, as the market goes against you, you will hope with every passing day the market goes down that it will be the last day. It usually isn’t and you will have lost a lot more money than you needed to. By contrast, if you have speculated in stock and it starts moving up a lot, fear will tend to creep in: you will think ‘this has gone up a lot, I don’t think it can last much longer, I better sell’. The result is you get out too soon and miss out on gains that should have been yours – due to fear.
With a systematic approach, based on discipline, rules, and consistency, we can avoid these emotional pitfalls, as we are not relying on speculative ‘ability’ but rather on a process, which has been tested and proven. This, in turn, helps us stay calm amid all the craziness, and through Forward Quant, it can help you stay calm too.