Systematic Investing – It’s The Process That Counts

Many people are content to leave the management (and outcomes) of their investments to others. However I believe it is important to have some type of understanding of finances and investing system if you intend to be in any way active in the management of your investments (which I think you should be). 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. If you don’t have a system, then I’m afraid to tell you, this is the way you invest. Buffett’s sidekick Charlie Munger says that investing is not easy and if you think it is, then you are stupid. Having a system can make you less stupid. Buffett is on record as saying they employ 4 filters (yes, there’s a book on them) when it comes to deciding where to allocate Berkshire’s capital. In other words, Buffett does not let “emotions” “vibe”, “feelings” or “gut instincts” play any part in his approach. Nor should you.

Older experienced investors can sometimes appear to make predictions based on their “gut feelings”, but the reality is that they are simply basing their opinion on a lifetime of experience and historical knowledge. As they say, history doesn’t repeat, but it rhymes. 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.

Steve tells me he can pick an inexperienced investor from an experienced one simply by determining whether they have a system. Most inexperienced investors buy and sell by hunch/gut feel. Yes, they’ll make money sometimes, but usually they lose overall because they let emotions like greed and fear dominate their decision making.

So what is systematic investing?

Success in investing is more about process than outcome – a good process will not mean all your investments are winners. Every investment is a mix of skill and luck. You can control your skill or your process, but you can’t control luck. Sometimes you will be blessed, other times cursed. But as Gary Player, the champion golfer said:

“the more I practise, the luckier I get”.

What you are actually doing when you develop a systematic approach, is training yourself to ignore your subjective, emotional approach to making decisions.

Having a system does not insulate you from emotions that come into play with investing. Even experienced investors get that initial onset of panic when your stock drops 20% in a day on a “bad” earnings announcement. Now allow me to contradict myself (Ok, I’ll blame Steve for this). Systematic investing is easy and difficult.

The “difficult” part comes first. It is in the development process. You develop your system and then sit back and implement it. But you suddenly have doubts when you see your most recent purchase decline another 20%. Yikes! I must be wrong. Or selling a stock and watching it climb 50% higher after you sold it. Suddenly there is an overwhelming urge, a temptation to fiddle, tweak or adjust your system because you didn’t capture that last 20% rise or avoid that initial 20% fall loss.

There are very few investors who say, “oh yes, it climbed another 50% but I’m OK with that. My system told me to sell, so I followed the rules”.

Announcing to the world that you have developed a set of buy and sell rules does not make you a systematic investor. Sticking to it does. So 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?

There are many trite slogans when it comes to investing. Twitter, like Facebook, is full of “preachers” with pithy aphorisms such as “let your winners run”. Of course no one tells you how long you let your winners run for. Or what happens if it starts trending downwards? How long do you let it decline before you determine it’s a good time to sell? Steve said he watches in amazement how people become interested in a company once it has run up 50% but didn’t want to know about it when it was down 50%. Or alternatively change their mind regarding an investment because it declines 50%. He calls it “emotional price discovery”.

Developing a systematic approach?

There are many ways to make money in the stock market. Ignore those who tell you that their method is the only way to make money in the stockmarket. What is important is having a systematic approach to buying and selling stocks.

Firstly, read….a lot. Read investments books about technical analysis, value investing, growth investing and others. You will find that you naturally gravitate toward a style that suits you. You may be time constrained so day trading is not for you. You may determine that you want to use technical analysis as your approach. You may prefer a style similar to value investing or looking for young companies that can experience rapid growth. In the development phase, you can revise your system, but do it on your readings not by what is happening in the stock market that day.

Secondly – talk to other investors. Ask them how they approach it. Do they have a system? Does it sound like a methodical approach or just haphazard? Are they experienced? (no bitcoin experience doesn’t count). Don’t count them out just because they didn’t beat the market last month or year. No system works 100% of the time.

Finally a word of caution. Developing a 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 is amazing how suddenly you 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.