Hi BMW, Become a Complete Fool
For some reason, when I read your story, I immediately thought of the post I mad a few days ago to JRice08 when he was asking if he had a BMW Portfolio.
Since you so eloquently put your experiences into stories that illustrate your points, I figured that maybe I should give that a shot.
Over the years, I've learned that investing is a lot like sailing. As a kid, I basically grew up sailing on my Dad's boat on the Great Lakes. When I first started learning how to sail as opposed to simply being a passenger, I was basically just doing as I was told. My Dad raced his boat, and I was allowed to be part of his crew. Back then, I didn't know very much about sailing and nothing about it really seemed to make sense to me. But the people I would be on the boat with would seemingly know more about it that I did, so I would listen to them, and do what they said.
As I grew older, I learned more and more, and I got to be pretty good. I learned how to read the wind in my sails, and make make minute adjustments to the sails to give my boat the maximum speed possible. I started racing in small one-man boats (Force5's or Lasers for anyone interested), and I thought I was pretty good. I could beat almost anyone in a straight line, but I wasn't winning many races. My Dad told me that my problem was I was making bad navigational decisions, but I didn't understand what he was talking about. Plus, being a teenager at the time, I obviously knew more than he did, so I kept doing what I was doing, and kept losing, even though I knew I was the fastest boat out there. I was growing more and more frustrated as my lack of success didn't make sense to me.
Finally, one day he sat down with a map of the race course and started to talk strategy with me. He told me that I was losing my races on the windward legs (sailing into the wind) because of how I navigated them. He explained that while my usual tactic to make as few tacks (turns into the wind) as possible in a windward leg theoretically made sense, in reality, the wind never stayed constant. As a result, I'd get further away from the course, and when I finally did make my move back to the mark, I would either come up shy of the mark and have to make additional tacks, or I'd overshoot it, and lose significant time to the other boats. By staying near the course, I would indeed make more tacks and lose speed during each one, but I wouldn't lose the race due to navigation.
When I finally listened to his advice and actually tried it (which took several more races because the old man couldn't possibly know more than me at age 15...), I found my race fortunes begin to change. I started winning, and winning a lot. It was the navigation that truly was the trick. I was no longer losing significant time to the other boats on the windward legs, and I continued to crush them on the other legs.
What I learned from this was that in order to win the race, I had to do a few things differently than I had been doing. First, I had to understand my past experience and track my results. As I found out somewhat painfully, just because I was the fastest boat didn't mean that I was going to win the race. I first had to come up with a strategy to keep me from self destructing in the races. Then, I had to lay out a map and plot a course on how I wanted to get there. Finally, I had to execute the plan, using my skills in sailing fast with my newfound navigational prowess. The results were rewarding not only by winning races, but even more so when I won the season championship in my class.
To me, this same strategy applies directly to investing. The steps are simple and straightforward.
1) Understand your past results - what you are good at and what you need help with
2) Determine a strategy (the BMW Method, for example) that you believe will help you improve your results
3) Lay out a course using that strategy that you believe will allow you to achieve your goals
4) Execute your plan to the best of your ability
Every investor needs to track their results and have a plan. Without these basic tools, you have no way to know if your efforts are being successful. Setting goals, creating a plan on how to achieve them, and then executing that plan is about as surefire a way that I know to become truly successful - in nearly any activity that you can think of.
My personal investing results have gotten remarkably better once I finally started tracking my results and making a plan on how I wanted to improve. My 'aha!' moment came a few years back after reading part of the Fool School's 13 steps about setting expectations and tracking results.
Prior to reading that, I thought I was doing fine at investing. When I read that article and realized that I knew the scores and MVP's (along with numerous other stats for every Super Bowl ever played), but I didn't know my own investing performance. I decided to go back and look at my investments and their performance and see how I stacked up to the S&P500. It wasn't a pretty picture. It was 1997, and I had lost to the S&P every year for the past 5 years. If I was losing to the S&P, why should I bother to manage my own money when i could buy an index fund that could get me that performance?
But I was determined to do better, so I sat down and made a plan. I determined that my first investing goal was to beat the S&P by 2% per year. It was a modest goal, but based on my history, it would require a quantum leap in my returns. I evaluated the stocks in my portfolio, and jettisoned the ones that I didn't think were going to help me achieve my goals. Then I invested the freed up capital in the stocks that I thought were going to work. I went from being invested in 38 stocks to holding only 15. And my performance took off.
I've since set higher and higher goals so that today my goal is beating the S&P by 10% per year. Come January, I'll likely be raising that goal since I've gotten better and learned more. Could I have dreamed of doing this well several years ago? Not likely. I didn't even know how I was performing. But once I did know, and once I came up with a plan, my success has definitely improved.
This saying pretty much sums it up: "If you don't have a map of where you want to go, how will you know when you get there, or if you are even going in the right direction?"
I like the course I'm on now. :)
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