Ben Carlson's blueprint for financial success

Dec 12, 2023

It certainly is not easy to stay the course when the world around us is so confusing all the time.

When conflicted, I always visit the writing of Ben Carlson, Director of Institutional Asset Management at Ritholtz Wealth Management. His straightforward, no-nonsense approach puts me back on track. A great advocate of simplicity, his advice is worth its weight in gold.

Here are some commonsense reminders if you find yourself getting swayed. But, more importantly, this is an extremely handy guide to get you started on your investing journey. (source is mentioned at the end)

1) Build a solid foundation.

Investing matters. You have to save and compound your money. But when you are young, it is not your stock picks or timing the market that will make you wealthy. It's really your personal finances. A focus on the market and investing is not nearly as important as putting a good foundation in place.

Develop good saving habits. Live on less than you make. This matters when you are starting out.

2) Take a hard look in the mirror.

Knowing yourself is more important than worrying about what other investors are up to.

Every investor has their own behavioural blind spots. We all have our individual biases. Some are far too emotional while others don’t have enough emotion. Some overreact, others under react. You need to look at your personality and mental and emotional make-up.

This is tough for a lot of people, because most people are overconfident in their own abilities. Especially in the market. If something goes wrong, it's really easy to blame something else. Blame the Fed. Blame interest rates. Blame the economy. Or whatever…

It's hard to look yourself in the mirror and say, “Well, maybe the reason that I lost money on this trade and in this investment is because I just didn't know what I was doing. I made a mistake.”

Do the hard thing.

3) Your strategy will develop out of honesty.

Taking off from the above point, self awareness is very important for an investor. Figure out what you are good at. What you are decent at. And what you really are not good at. And try to separate them.

A good strategy you can stick with – one that fits your personality type - is vastly superior to a great one you can’t stick with. Don’t go for perfection. Perfect is often the enemy of good when it comes to investment behaviour.

I'm generally a numbers-kind-of guy. But I've picked stocks in the past because I thought I knew the company, or understood its business, or I use the products and buying them made sense. I've had plenty of those mistakes. That's one of the reasons I've more or less retired from stock picking. I don't have the personality traits to pick individual stocks. A lot of people do, but for me it just hasn't worked out very well in the past, and I know that I'm not a very good stock picker.

One of the things is admitting to myself that I'm just not very good at this so maybe I shouldn't do it.

4) Diversify.

It is easy to look back and say that your returns would be so much better if you had not done this or only done that. With the benefit of hindsight, the only perfect portfolio is looking back historically. No one knows what the perfect portfolio or optimized portfolio is going forward.

I invest globally. I invest into different asset classes.

When you’re diversified, there's always going to be something in your portfolio that is going to hold you back or make you wonder why you did that. Brian Portnoy always says that diversification means always saying you're sorry.

But it is a risk control that is so important. Don’t ignore it.

5) Watch your focus.

A lot of people get confused when stocks just kept going up in a bull market. And panic when they go down in a bear market.

Sometimes stocks go down. Sometimes stocks go up.

The stock market does go up because of profits and innovation and human ingenuity and all of that stuff.  But humans are emotional. We’re irrational. We make dumb decisions at times. We change our minds. We take things too far. We’re volatile. So the stock market shares all of these characteristics too. The combination of money, greed, fear and uncertainty about the future means the stock market has to go down sometimes.

Short-run losses in the stock market are a byproduct of long-run gains. We have crashes, deep recessions and geopolitical upheaval, but the world doesn’t actually come to an end. There are always going to be scary headlines and intelligent-sounding narratives about why the world is coming to an end, but things usually work out.

Investing involves risk. And risk never completely goes away no matter how hedged you think you are. Every investment decision you make is simply a trade-off from one risk to another. There is no single way to invest that will guarantee success or the results you would like.

My strategy is to continue saving and investing and following my plan no matter what the market is doing. None of us controls what happens in the market. But we all have control over how much we save, how we allocate our assets, how often we check the market value of our portfolios and how we make intelligent investment decisions.

You focus on what you can control and let the chips fall where they may.

6) How you measure success is important.

There’s so many different metrics to look at when measuring success as an investor.

Am I outperforming the market? Am I staying in line with the market? What's my risk-adjusted return?

How about changing the questions and the way you approach success?

Am I on track to achieving my financial goals? Because that is what matters eventually. Doing better or worse than your neighbour is of no help. Measuring alpha and comparing it with other funds and stocks is of no help. All these are distractions with severe consequences.

Ben Carlson on self awareness and meeting your heroes
Ben’s 4 common sense rules of investing
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