Lesson 3 of 7
In Progress

Successful investors all have one thing in common – they compulsively measure.

Team-Carepital August 18, 2020

Warren Buffett has always been a supremely confident investor. Even when he was a relatively inexperienced young fund manager, he saw his main competition as the Dow Jones Industrial Average – the famous New York stock index. His one job was to grow his fund at a faster rate than the market. It wasn’t as easy as it sounded.

The key message here is: Successful investors all have one thing in common – they compulsively measure. 

We all know the stress of checking your bank balance after a big weekend or stepping on the scale when trying to lose weight. For a lot of people, the anxiety of failure might be too much to handle. But to be a successful investor in the mold of Warren Buffett, you’re going to have to get over those anxieties. Careful measurement, clear-eyed analysis, and a steady hand – even when you’re down – are the only ways to succeed as an investor.

OK, time for some more Buffett-style straight talk. The difficult truth is that most people aren’t shrewd enough investors to beat the market. It was huge for Buffett to deliver returns greater than 7 percent annually. But the miracle of compound interest means that you only have to do a little better than the market to create the potential for serious financial gains.

Knowing what to measure – and then doing it properly – is the only way to know if you’re on the right track. So how do you compulsively measure? You need to monitor your investments every day, keep track of how they’re doing relative to past performance, and be patient when your chips are down. It takes energy, commitment, and honesty. In short, you’ve got to know when to hold ‘em and when to fold ‘em.

You’re not just measuring your results against past performance, though. Each year’s results should also be measured against the market. This means if the market is down, and you’re slightly less down, this still counts as a win.

There’s good news, too. When Buffett was a young investor, doing better than the market was a lot harder than it is now. It’s easier today thanks to index funds. Pioneered in 1975, index funds combine slices of many different companies on a given stock exchange. This means their returns broadly match the gains and losses of the overall market.

Buffett advises those who don’t have the time or energy to devote to their investments to buy the index. Otherwise, compulsive measuring is the only way to determine how you’re doing.