November 22, 2006 The rules of elite military special ops have a lot more in common with investing than you could ever imagine. Improve your Wealth Literacy with the following lessons.This past May, the following events occurred.
The Indian stock markets dropped 45%, the FTSE in London dropped 10%, the Brazilian stock markets dropped 30%, the U.S. stock markets gave up all of their gains from the first half of the year, with many individual stocks down 25% to 30%, Japan dropped 20% and so did Mexico. Mutual funds were hit even harder (again why I hate mutual funds and why owning Chinese mutual funds is dangerous because I guarantee you this very situation will hit China in the future, so don’t say you haven’t been warned if you hold Chinese mutual funds and not individual stocks).After being the darling mutual fund performers in 2005 and for the first half of 2006, leading Russian mutual funds fell 50% and leading Turkey mutual funds fell 70% in a matter of weeks!
When these events happened, any good investor would have been prepared weeks ahead for this occurrence. And if they weren’t, if somehow they were caught off guard, then at a very minimum, they would have adapted heavily with a serious change in game plan. Since the global markets have rebounded so nicely since then, most everyone has since forgotten about the huge setbacks from this past summer. But as you know, I believe a lot of danger is lurking in these markets today despite the euphoria.
Below are the lessons I learned while training in martial arts with a Navy SEAL instructor for four years. (Disclaimer: I want to emphasize that I never trained with a Navy SEAL but that I trained with a Navy SEAL instructor!) These are all lessons that continue to help me immensely in my work and that should greatly enhance the performance of your portfolio as well. So enjoy. Below are the first 7 of these real-life rules by which SEAL team members operate. In part II, I’ll reveal the last 7 rules. Stick to these rules as an investor and you’ll do okay in these markets.
1. Master the basics and you will be a good operator.
This is why you must paper trade first if you have never traded in the markets before. You cannot be a good trader without mastering the basics.
2. Never make the same mistake twice.
Though you should experiment a little bit when you paper trade, you should strive to never make the same mistake twice. You want paper trading to be of utility, not be a useless exercise.
3. Strive for perfection. You’ll never get there; perfection doesn’t exist for SEALs but we can always do better.
Again, remember that this is one of the most important traits you can identify in a superior financial consultant. If they take great pride in their work and craft, not in just making money, then they’ll invariably be mad when they lose your money and will work even harder to get it back. They won’t accept a bear market as a reason that you’re not making money and will work even harder to try to earn you money, exhausting all investment possibilities.
If they just take great pride in making money, which many financial consultants do, then they’ll still sleep like babies at night even as you lose more and more money, because it doesn’t matter to them. Even as you lose money, they are still earning lots of money so could care less about trying to do the best thing for you. Many financial consultants take pride in making money, not in earning great returns. It is quite possible as a financial consultant or fund manager to earn huge sums of money while losing great sums of money for clients. Just ask Brian Hunter at Amaranth hedge fund. He lost over $6,000,000,000 of clients’ money in just a matter of weeks this past year. What was his personal pain? Besides getting fired, that’s about it. And he still had his $75 million that he earned from the prior year with no clause requiring him to give it back after losing $6,000,000,000 of his clients’ money.
A superior financial consultant will NEVER tell you that you should expect to be down just because the markets are down in a particular year. He or she will only speak of how to earn your losses back and still end the year positive. And if you trade your own accounts, during abnormal times, well, you just have to suck it up and get less sleep. Trust me, with very large accounts, it can be the difference between only being down $30,000 versus being down $200,000 in these markets. And after you weather the storm, it can be the difference between being up $200,000 or still being down $100,000. So strive for perfection.
4. Our job is not eight to five. You cannot be number one in the world and not put in extra hours.
I’ve worked at large investment firms during very bad markets and observed that the majority of financial consultants never changed their hours and worked any later than normal. Many financial consultants claim that they believe in working smarter, not harder. That’s just a euphemism for the fact that they don’t want to work hard — ever. To be the best, you always have to work harder than everyone else. There are no shortcuts to this in any endeavor, whether in investing or in martial arts. Even when I trained in martial arts, to be granted my black belt, training during regular session wasn’t enough. I always sparred on weekends or worked on submissions with my training partners during “extra” sessions. Investing is the same. If you’re lazy, you’re not going to get phenomenal returns in your portfolio.
The Navy SEAL trident pin is represented by an American eagle with his head bowed. The eagle’s head is bowed to represent that the SEAL is humble and knows that perfection is unattainable. However, it is this attitude that leads to a level of expertise as close to perfection as possible. This attitute in investing also is the correct one as well.
In eight years of working at the private wealth management offices of Fortune 500 companies, not one time did I ever hear a story of financial consultants/ private wealth managers that did research on their own time for their clients over the weekend to find phenomenal investment opportunities. Not once in two thousand, nine-hundred and twenty days. But I heard at least a hundred stories of advisors that met with clients over dinner or lunch to schmooze them or advisors that met new prospects to try to close sales. That should tell you something about earning phenomenal returns and the fact that this hard work is going to have to come from you.
5. Be a subject-matter expert in your field.
SEALs divide knowledge responsibilities among their teams. Their expertise in certain areas is nothing less than astounding. The communications experts have more knowledge than electrical technicians, able to build radios out of almost anything. Others become combat medic experts, their knowledge more specified than Harvard doctors in infectious disease and combat inflicted wound repair. Every SEAL is expected to gain a specialized set of knowledge.
You should also gain some industry expertise knowledge. Whether you choose the alternative energy industry, the pharmaceutical industry, precious metals, oil and gas, it doesn’t matter. Just become an expert. And form an investment group. You’ll be bound to be able to leverage the knowledge of some specialized experts here. Or if that’s not your style, join one elsewhere. Just join one. And make sure everyone in your group is subject-matter expert. Your team will be that much stronger.
6. Train as you would fight.
In this case, since we are not SEALs (well actually I guess there is a slight chance that some of you out there may actually be SEALs), there is no fighting to be done here. Only against the U.S. Federal Reserve Chairman, the weakening U.S. dollar, and global inflation.
This rule only really applies to beginners. Those learning to trade stocks. When you start trading for real, your paper trading results will serve as a good proxy for how you will perform when you start using real money, but only if you paper trade as if you were using real money.
So experiment at first, but no longer for three months. Within this time, develop your buying and selling strategies and industry specific leanings. After three months, start paper trading as if you were using real money.
7. Think ahead and stay organized.
SEALs will win if they stay just one step ahead of the enemy. But they aren’t satisfied with being just one step ahead. They want to be three, four, or five steps ahead of the enemy. In investing you’ll never win unless you are also at least one step ahead of the economy and ahead of the “thundering sheep herd (my euphemism for the mindless public masses).
When global markets sharply corrected this past May, many people were caught completely off guard. And when it happens again, the same people will probably be caught off guard once again. But they shouldn’t have been and they should not be now either. Because back then almost all the top technical indicators had been signaling a sharp pullback for weeks. Right now, we have a lot of ominous indicators as well (not being splashed across newspaper headlines or the TV but lurking underneath the surface). However even though I liquidated many stocks in preparation for this pullback and then bought back many stocks in partial, not full, positions after they had dropped 15%, this still proved not to be the best strategy in a very volatile market.
However, as I mentioned before, the worst thing an investor could do is panic — and buy high and sell low. So you must adjust and adapt your game plan. And you can only do that by knowing exactly what you own and if the stocks are down just because of the worldwide global weakness in the markets or if they are down because they are terrible stocks and would have tanked anyway. You can’t win in the stock market just by thinking about today and reacting to what is happening now. The only way to win is to think ahead.
Stay tuned for Part II.
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J.S. Kim is the founder and Managing Director of maalamalama, a fiercely independent research, consulting and education firm that focuses on building intelligent low-risk, high-reward investment and wealth preservation strategies.
