Today, in several countries, investing in stocks is easier than at any other time in history. It is relatively straightforward for one to start investing or trading stocks, ETFs, Mutual Funds, and various other securities within minutes often after downloading a smartphone app and opening an account with one of several available providers. At the same time, there is an abundance of data, investment advice, and financial and economic information of a wide range of sophistication and quality.

Despite this availability of resources, discussions about the Financial sector in media, the press, and investor forums are often simplistic which creates an opportunity for those willing to invest time to understand the unique characteristics of Financial sector companies.

Investors need to realize that the Financial sector is not uniform and that there is enough differentiation among Financial sector companies that knowledgeable investors can always find investment ideas despite the outlook for the economy, interest rates, regulation, politics, and so on as Financial sector companies are not uniformly exposed to the same risks.

For the inquisitive investor, reading this post it should be no surprise that a company like Aflac has a completely different business model and is exposed to different risks than JPMorgan Chase or that American Express is not comparable to Blackrock. What is more interesting in my view, is that Financial sector companies are not directionally sensitive to the same risk. Therefore, it is important for anyone investing in the Financial sector (as I am sure it is for investors in Technology) to understand how the companies they invest in generate profits.

To state the obvious in plain English, owning a common stock gives its owner a legal claim to its net worth or, a residual claim to its assets, in bankruptcy so one better knows how the company creates this net worth which not by chance is called Shareholders’ Equity by accountants. Parenthetically, it is worth remembering this fact when one tries to estimate the fair value of a stock.

Investors who spend time understanding how a company makes money can “discover” opportunities to buy as well as to sell/short stocks. As a relevant example to my investment portfolio, the 54%  decline of Rocket Mortgage (Symbol: RKT) over the last 12 months and 27% decline so far this year, is completely natural and was highly predictable to any investor who understood the mortgage originator’s business model and had a view that long-term rates were heading higher.

One of the benefits of professional independence is having the luxury to “read” (often with the help of Audible) more than annual reports, economic releases and sell-side research, that had dominated my reading in the last few decades.

Tren Griffin’s “Charlie Munger, The Complete Investor” discusses in detail the views of Warren Buffet’s partner on numerous topics of interest to investors, including the concept of risk. Investors, allocators, economists etc. tend to define “risk” in statistical terms that one way or another incorporate the concept of volatility of investment returns. Anyone, with access to the internet can learn more about volatility, standard deviations, variances, correlations, betas, factor models and so on, in much more detail than I could discuss on this posting.

For some, like Mr. Munger the one risk that really matters is the risk of losing money. Whether or not the value of one’s portfolio fluctuates appears secondary for such a long-term and disciplined investor.

The problem is that not all of us are long-term oriented and are not disciplined either. For the “common man”, or the so-called “average” investor, volatility is a true risk because, for one, it often triggers action that may be against one’s financial interests. Volatility in other words can trigger decisions that would result in loss of investment performance or loss of principal.

So, instead of aspiring to “beat the market” it may be more beneficial to one’s investment success to focus on reducing the volatility of one’s portfolio.

Every now and then someone will look at me as if I have “two heads” when I proudly declare, without any hesitation, or doubt, that in my personal investing I do not care if I “beat the market”.

Yes, that’s right! I don’t care if “The Dow lost 800 points” or if “Futures point to a higher open this morning” as news sites, TV stations, social media and so on will never stop letting me know.

I don’t feel good, or content, if the S&P is down ~9% so far this year but my portfolio is down “only” 1.5% and I don’t feel great that my personal account is up 51%+ while the S&P 500 is up less than 39% with its dividends reinvested since the end of 2019.

But, I feel “pretty-pretty good” (yes, I am one of those Seinfeld fans) for myself and my financial future because I am on track to double my net worth every five years which is what a 15% annual return does for you.

And why does that make me feel “pretty-pretty good”? Because doubling my net worth every five years is my personal financial goal, or to be exact… one side of my financial goal. I will write about the other half on another equally short article but if you are curious think “even quilled”, wink-wink…

In conclusion, I don’t know what your personal financial goal is, or what you value in life and I am not in the advice business nor do I sell anything.

So, instead of aspiring to “beat the market” it may be more beneficial to one’s investment success to focus on reducing the volatility of one’s portfolio.

Note: The image presented above shows a series of returns in blue that is 38% as volatile as the orange bar data (daily returns of the SPY ETF). During the period presented, the blue line strategy has outperformed the SPY by more than six percentage points.