3 habits of successful investors

It’s human nature to be captivated by unbelievable stories, great victories and thrilling endings.

Consider the world of sports, where fans live for moments of high drama and climactic endings — the buzzer-beating 3-pointer to secure the National Championship or the last-minute touchdown drive to win the big game.

In the realm of investing, it’s easy to be drawn to these epic plays, such as when Michael Burry and Steve Eisen made billions from betting against the U.S. housing market in 2008.1 And more recently, Bill Ackman, who shorted the S&P 500 right before the March 2020 COVID shutdown, pocketed a cool $2.6 billion as markets plummeted.2

However, while the allure of pulling off a sensational investing victory might appeal to our thrill-seeking nature, this fixation can lead to suboptimal decision-making and inferior long-term investment outcomes. Instead, investors are likely better suited to opt for a strategy that is much less exciting.

With this in mind, investors may benefit from adopting three key habits:

1. Obsess over small details, ignore the uncontrollable 

In the intensely competitive sport of Formula One (F1) racing — where top finishers are commonly separated by less than one tenth of a second per lap — tiny gains can make all the difference. An F1 team can invest a lot of money in developing a fast car and hiring a marquee driver, but if they ignore the small things, it can all be for naught. The best teams expend little energy on things they cannot control, like weather and stewards' actions, while being hyper focused on shaving fractions of a second off their lap times in areas they can control, such as pit stop strategy, tire selection and car setup. The F1 teams that dominate the thousands of small decisions that transpire in a race weekend will ultimately be the most successful over the long run.

Similarly, sound portfolio management is the culmination of thousands of small decisions that add up to a robust portfolio, irrespective of what happens in the macro environment.

While some world-renowned investors have become famous for one or two big decisions, their investment success was largely founded on a lifetime of small decisions.

On most days in financial markets, there is no big event, no big story and no heroic play to be made. So, instead of sitting on the sidelines waiting for something big to happen, or worse, hoping for something big to happen, investors should consider implementing a strategy that relies on accumulating incremental gains.

2. Seek out positive opportunities, not negative

Investors can adopt one of two mindsets when seeking investment opportunities:

  1. Invest in something one believes will do well
  2. Bet against something that one thinks will do poorly

In our view, the first option — investing in positive opportunities — is more straightforward and less risky. Betting against something creates internal conflict (which can be stressful in the long term) because one is ultimately hoping for something to fail to generate a return. In our view, a better approach is to look to profit from a company or sector’s success, not its failure.

An example of this can be seen in the commercial real estate (CRE) market. For more than two decades there has been a shift away from traditional brick-and-mortar retail to e-commerce. Malls have struggled, while the industrial sector has done relatively well as retailers close stores and move their merchandise to warehouses to be sold online. Yet, while malls have lagged, they haven’t exactly been the anticipated home run for short sellers, as the graph shows below.

After accounting for carrying costs, there have been very few points in the last 13 years where an investor would have profited from a short position in the mall sector. In contrast, an investor would have done much better investing in industrial warehouses, which have continued to thrive as e-commerce has grown.

Source: Green Street Advisors, as of Sept.1, 2023. Past performance is no guarantee of future results.

3. Take what the market is giving you

On any given day, financial markets are offering a range of opportunities to investors.

These differ from one day to the next depending on various macro- and micro-economic factors. While much attention is given to the economic environment in which companies operate, we believe investors would be wise to pay more attention to what markets are giving them in the form of expected risk-adjusted returns. It’s easy to get tangled up in making predictions about unknown (and largely unknowable) events and how those unknown events may or may not affect various investments.

An example of this is in the U.S. fixed income market, where the current yield to worst (YTW)3 on the Bloomberg U.S. Aggregate Bond Index (U.S. Agg) has historically been a strong predictor of 5-year annualized forward returns, with a correlation of 0.94. As such, investors may find it a more productive exercise to pay attention to current YTW than to try, for example, to predict the path of future inflation or interest rates.

With the sharp increase in interest rates in 2022 and 2023, the starting yield on the U.S. Agg is now higher than at any point since 2008. While past performance is no guarantee of future returns, starting YTW has historically been a reliable indicator of forward annualized 5-year returns on the U.S. Agg.

Source: Bloomberg, as of Aug. 31, 2023. U.S. Agg yield to worst period from Jan. 31, 1976, to Aug. 31, 2023. U.S. Agg 5-year annualized forward returns period from Jan. 31, 1976, to Aug. 31, 2018. Past performance is no guarantee of future results.

Bottom line

From inflation and interest rates to the debt ceiling debacle and turmoil in the regional banking sector, sensational economic events have dominated headlines in 2023. While there is value in being informed, investors, in our view, should not allow the potential outcomes of these events to drive their investment decisions.

Rather, a strategy that focuses on building a robust portfolio through evaluating individual investment opportunities based on their expected risk-adjusted return may be a better long-term approach.

If you have questions about how your portfolio is built for the long run, reach out to your Ameriprise financial advisor.