Warren Buffett said: "Investing is simple, but not easy." Investing is simple. To be successful, you only need to follow the 30 prudent rules of investing laid out in Appendix A. However, it is not easy because there's actually more to investing. Writing in the Winter 2003 edition of the online journal The Efï¬?cient Frontier, author William Bernstein laid out these four additional requirements for investors to be able to succeed on their own:
- "An interest in investing. It's no different from cooking, garÂdening, or parenting. If you don't enjoy it, you'll do a lousy job. Most people enjoy ï¬?nance about as much as Carmela Soprano enjoys her husband's concept of marital ï¬?delity."
- "The horsepower to do the math . . . The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation? Correlation, for God's sake? Fuggedaboudit! "
- "The knowledge base- Fama, French, Malkiel, Thaler, Bogle, Shiller-all seven decades of evidence-based ï¬?nance back to Cowles. Plus, the 'database' itself-a working knowledge of ï¬?nancial history, from the South Seas Bubble to Yahoo!"
- "The emotional discipline to execute faithfully, come hell, high water, or Bob Prechter. Mr. Bogle makes it sound almost easy: 'Stay the course.' Alas, it is not."
Bernstein concluded: "I wish I had a nickel for every smart, savvy, and motivated ï¬?nancial type I've met who simply could not execute."
This last point is extremely important. Investing is simple but not easy because, while staying the course is easy when everything is going well, when bear markets inevitably arrive, the best-laid plans can end up in the trash heap of emotions. In other words, it is much easier to establish a good investment plan than to adhere to it. Peter Lynch advised: "Whatever method you use to pick stocks or stock mutual funds, your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investÂments to succeed. It isn't the head, but the stomach that deterÂmines the fate of the stockpicker."
There are some individuals who can do it all on their own. If you think you are one of them, make sure you meet the four requirements laid out by William Bernstein. And be sure you are not falling prey to the all-too-common human tendency toward overconï¬?dence.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Quest for Alpha: The Holy Grail of Investing. Copyright 2011 by Larry Swedroe. This book and e-book is available at bookstores, through Amazon and Barnes & Noble and from the Wiley Web site.
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