I comfortably read 20 books a year. I’ve got a full-time corporate job, I’m a full-time dad, and I self-manage my entire investment portfolio as well as this website.
Working as a senior process improvement professional has helped me immeasurably in my personal life and it has given me the ability to manage all of these things at the same time.
Here’s eight clear ways that you can draw on the concepts of process improvement to dramatically improve your investing skills and, more broadly, your personal financial management:
1. Understand your problems and what you want to specifically achieve. That means: plan first!
Having trained more than a five-hundred adults in the basics of process improvement over the last ten years, there is one lesson that I think stands above the rest. People – especially in the developed world – tend to very quickly move from Problem to Solution. We jump straight into solution mode and tend to value doing a lot more than thinking and planning.
In this regard Einstein had the best advice: “If I had an hour to solve a problem I’d spend 55 minutes thinking about the problem and five minutes thinking about solutions.”
That’s exactly what you need to train yourself to do when it comes to investing. Rather than focusing on the end goal (finding stocks that will go up 1000 fold so that you can be rich), try to focus on the basics. How do you track your finances? What is your end goal? Focus on thinking about that problem and defining what you want to achieve, first.
Investing legends like Warren Buffett are famous for this. In fact, he’s probably sitting in his armchair reflecting right now, after his elephant sized acquisition for Tech Data was rebuffed by a higher bidder last week. Imagine having $130 billion dollars and the stomach to not spend it for years, until the right deal comes along! For Buffett he probably spends 99.9% of his time planning and 0.1% executing. Very few investors do the same.
2. Measure everything that you do using data, numbers and fact.
I simply never start a business process improvement project without a stable measurement system in place.
The key to successful investing similarly requires research and quantification. I get asked all the time why I don’t invest in Bitcoin, helium, lithium or electric car companies like Tesla. These investments all have one thing in common: very unstable and spotty returns over the past 5 years. Wide, unpredictable variation, too much debt, and too much risk. It isn’t simply the finite return (Bitcoin’s is quite high), it is the variation and risk.
In 2018 Bitcoin collapsed 72.2%. That is dire compared to the worst stock year in history (2008), when stocks fell 38.49% over the course of the year. Crypto-currencies have suffered multiple thefts, collapsed exchanges, and unpredictable prices. They are not backed by governments or banks, which is a huge risk.
Here’s a basket of lithium investments and their performance year-to-date: Global X Lithium (-16.26%), Albemarle (-14.19%) and SQM ADR (-48.91%). And no, in case you’re thinking, they didn’t do great over 3- or 5- year time periods. Compare that to the 18-23% returns in stocks year to date and that’s a big differential.
Tesla’s had a good run over the last 3 months but it is a volatile stock (-0.62% YTD) and the business still doesn’t make a profit. It also suffers from eye-wateringly, mind-numbingly bad debt mooted to be over $10 billion.
When you use data, numbers and fact to make your decisions, suddenly, you no longer require experts to help make all of your financial decisions for you. Use data cautiously and wisely – to help inform your decision making. Start small and build your knowledge
3. Get used to saying ‘no’ and ‘maybe later’ a lot or simply automate your passive investments
Saying ‘no’ – often – and taking a steady, conservative approach is the best path towards long-term wealth. When you are confronted by companies that have amazing growth prospects, but don’t turn a profit, be prepared to say ‘maybe later’ until the time comes when they’re making a tidy profit on a sustainable basis.
My personal bug-bear are the advertisements you see on Facebook and the internet for trading stocks or currency. You know, those trading seminars for currencies, forex and day trading. It’s absolutely dumbfounding because the average rates of return for day trading (which they legally have to put on their websites) state that at least 73% of the people who register for these risky accounts lose money. Take that longer term: day traders who stick at it for 10 years are 95% likely to lose money and under-perform the market. Read “Stocks for the Long Run” by Professor Jeremy Siegel for further research on why this is the case. Yet tens of thousands of people sign up and pay for the advice….!
4. Beware of ‘nice narratives’: Use critical analysis to determine the truth
In my old job I remember being asked by our Chief of Staff to independently assess the feasibility of a £10 mn project. There were a lot of conflicting views. By understanding the problem (Point 1) and using data to assess the situation (Point 2), followed by critical analysis (Point 3), I determined that putting the solution in would lead to massive failures, staff walk outs, and complete bedlam for a plant with hundreds of staff. You could imagine how that went down!
The point is you need to use critical analysis and that thing between your ears to think your way through problems, whether process improvement or investing. Sometimes you’ll arrive at conclusions nobody expected. If you’ve done your research right more often than not, you’ll be right.
I wanted to invest in Cameco – a Canadian uranium miner – because of a powerful narrative around a resurgence of uranium prices as the world recovered from Fukushima. There were hundreds of articles on the net that said the same thing. But the news inside the company and the annual reports was dire. I put off buying it, again and again, until I could see an inkling of a turnaround. That turnaround never came: it is down 77% since its peak in 2011.
When I switched to passive investing (effectively diverse baskets of shares where your money is evenly spread) I realised that the returns were superior and I would take on less risk. I did my research and invested slowly. I opened up a SIPP account and got tax-rebates from the government through my tax code by ringing HMRC. The back-tested data is far better and the returns are safer. As a result, the majority of my investments are passive and I don’t own many shares directly.
5. Spend very little for maximum gain. Find ways to spend little and save a lot, or don’t spend at all
At work – recently – my team have invested in a technology for £32,500 that will deliver a benefit within 3 months and pay itself off 3.5 times over by the end of a 12-month period. Other managers are quite content spending £1,250,000 for speculative and far-reaching technologies that will take 12-15 years or more to pay off for the firm. Who is more likely to get a pay rise at the end of the year?
My wife and I have been at the Frugal Investing trade for a long time. It comes quite naturally to us. One of her cutest initiatives in the house is to take the bottle of hand-soap from Aldi and put a hair band wrapped tightly around the head. When you press down, you get half the amount of soap. Provided you don’t triple dip that saves us money every time I go to wash my hands! And it cost nothing to put in.
Rather than upgrade her car my wife’s stuck with her battered VW polo, saving around £18,000 on what we would have shelled out for a people carrier. Also, despite having the resources to buy a bigger house, we’ve decided to stick with our modest 4 bed that we picked up for a good price in 2012. That’s the biggest saving of all: we’ve saved £9500 SDLT tax, an extra £200k mortgage, £3k interest on the mortgage, and the added upkeep bills and maintenance (£4,500 per year).
It’s all part of the same strategy: spend little, save a lot. Instead of a £200k mortgage that costs me £3k/year in interest, I have £200k in investments earning me £16,000 per year in income and capital gains.
6. Choose between ‘Self-management’ and ‘Autonomous-management’
At work I often have to decide whether I personally run a project, or I support somebody else to have the skill to run it.
There is a very clear and helpful distinction for you to make early when it comes to investing. Do you want to self-manage your investments or are you more comfortable handing over that management to somebody else and using it more like a supercharged savings-account? For a taste of the self-management side have a look here for UK investors (and here for Canadian investors)
For those who want to self-manage, open up a SIPP account and/or a stocks and shares ISA, and make sure that you do so with an established provider.
For those who want to put their investments completely on autopilot and simply make regular deposits to it, like an additional pension, there are providers called ‘robo-advisors’ like Nutmeg in the UK who will do that for you.
Both of these approaches are covered by the Financial Services Compensation Scheme (FSCS) for up to £85,000 per account.
7. Make small, incremental gains – don’t hunt for Moby Dick or you’ll end up like Captain Ahab
The monomaniacal captain of the Pequod – Captain Ahab – allowed his anger and pride to get the best of him. Despite all of the warning signs, despite all of the opportunities to back away from the proverbial precipice; he tore forward and pursued the white whale until it dragged him to the bottom of the sea.
It is extremely rare that people make millions and retire early off 10x, 100x, or 1000x returns on individual shares. Whatever you do, don’t chase these out-sized returns. Smart investors have 80-90% of their money in stable and diversified investments. It’s that 5-10% of your funds that you can consider – when you have the experience – investing on more speculative opportunities. Personally, I don’t even recommend that.
Instead, try to focus on learning about how the stock market works, and invest in a way that allows you to capture the long-term benefits without taking on too much risk.
8. Be careful and learn slowly – fools rush in
Business process improvement projects principally fail because people skip steps. I teach a 5 step method: define, measure, analyse, improve, control. The vast majority of people skip straight to improve. A good handful skip to analyse. They rarely start at the definition stage.
Could you believe that there is a well-known phenomenon whereby people buy the wrong stocks? This happened when Slack had its IPO, and confused investors mistakenly buy Forward Industries (FORD) because they assume it must be Ford Motors (F).
What is a dividend? There are people speculating on share prices right now that don’t realise you get paid just for holding the shares. That’s what a dividend is. While traders are busy buying and selling the FTSE 100, or trying one of those ‘hot’ day trading apps, they could simply invest in the FTSE 100 index and receive 4.8% in income per year, on top of the capital growth of the index.
I thank my loving wife and family first and foremost for their support. The rest I chalk down to a relentless focus on continuous improvement. At its core this is the concept of small, incremental gains, made one after the other that compound over time. Throw away these notions of ‘great, noble men’ and the black and white binaries of ‘success’ and ‘failure’. Every day you spend reflecting on them is another day lost towards achieving your goals.