Hey @Lewis. I always find it interesting to hear about people's individual approaches to investing. Thanks for sharing your thoughts. Often helps me reflect on my own approach.

Personally, I don't find it useful to set a specific top-down outperformance goal for my overall portfolio, eg I don't think "I'm going to outperform benchmark X by 5%". That's not controllable with my approach to investing.

Instead, my approach is bottom-up. I look for 6-10 companies that I have time to research that offer the best ROI over the next 5 years. They won't be the best 6-10 companies, because I don't have time to research all possible companies. But if I can research maybe 20 companies in a year, then I choose the 6-10 best out of those. From one year to the next, the majority of the 6-10 invested companies will not change, but I will likely replace some with alternatives that I think offer a higher ROI.

My average forecast ROI over my 6-10 companies might be 20%, or might be 8%. I don't care. It's the best that I can find at that point in time. And of course the ultimate outcome will not be what I predict. It will be higher or lower. I can't control that. You load the dice as much as you can, throw them, and take whatever comes your way.

To your point about not getting trapped, I should say that the approach I've described above applies to only 40% of my portfolio. I have another 40% in ETFs, and another 20% allocated to cash. That 40:40:20 approach helps me sleep comfortably. If my 6-10 individual companies collectively have a bad year, that's ok, I can draw upon cash or EFTs to put food on the table.

Thanks @DrPete. That's a very thoughtful approach, not too far away from where I've ended up. I like that you value the "sleep at night" factor. Efficiency and optimisation are talked up all the time, but there are plenty of situations where a buffer and some ballast are better.

@Lewis Your motivation for beating the market is unclear, but I’m assuming it’s to be happier? That's a more complicated subject.

I hate to say it but the chances are that the average fund manager cannot beat the market long term. Perhaps you have the skills to do so or there are other reasons to manage your own money such as a a fun hobby, financial literacy or tax efficiency? But, in reality, your wealth depends on much more than investing. 

The principles I wish I knew earlier goes something like this: 

1. Earn good money
2. Spend carefully
3. Invest your savings wisely
4. Minimise tax

The first two points are effectively “spend less than you earn”. Earning capacity usually requires investing in yourself to efficiently convert time into money. Exploit what you enjoy doing and are naturally good at. Be careful with expenses and purchases. Try to cultivate a “value mindset” rather than being a tight ass. I.e. Spend money where you derive good value. Find things that don't cost much that enrich life. Don't live where you are unhappy, or go without things that are really important to you. Go out at happy hour. If something is half price, spend the savings on a treat! My point is, you don't have to feel poor.

Congratulations, you now have savings to invest. Optimise your risk/return and be patient. Eventually your investments will compound and hopefully generate significant additional income and life will become easier. Take more investing risk early in life to achieve more growth. Scale it back when you have more to lose and less time to recover any losses. This includes appropriate diversification so you are not overly exposed. If you have enough spare time and really enjoy investing you can get more sophisticated and potentially increase your returns. This is where stock picking and potentially “beating the market” comes in scope. I have a core and satellite approach to this, with the smaller portion in stock picks.

I have discovered the hard way that reducing tax is an under appreciated factor in building wealth. I now believe that time spent understanding tax rules is more important than stock picking. The more money you earn, and the longer you invest, the bigger factor tax becomes. It sneaks up on you. You buy CBA shares for $10 and put them in the bottom drawer with no plan for the tax implications, and when they go up to $150 the ATO could potentially take a massive chunk. For most people, the family home and superannuation are the major tax shelters that can be life changing. Use them.

Lastly, without becoming too philosophical, I believe that investing should really be thought of more holistically with your lifestyle and other goals. Consider other happiness factors such as your health and relationships. Investing takes up your time, so there are trade offs with other activities that you could optimise for. E.g, time can be used to stay fit and this may reduce your medical costs so you need less money and ultimately extend your health span. Time spent with your partner may save your marriage and you won't suffer a property settlement :-). These are all things that could have been brought to my attention yesterday.

Note: A good book to read is The Psychology of Money by Morgan Housel. It has a twist a the end that I didn't see coming.

Hi @actionman, there is some fantastic wisdom there, thanks for sharing. Some of these ideas and strategies take years and decades to play out, so I'm all ears when someone who has been there and done that offers up some perspective.

You are right, happiness is the ultimate objective, but as you say that's complicated. "Relaxing" and "enjoying the moment" are skills I'm working on but am yet to master. We seem to be hard wired as a species to occasionally make ourselves and each other miserable for no discernible reason other than some evolutionary hang up where being pessimistic, sceptical and on edge made you slightly more likely to survive.

In terms on wanting to beat the market, my default is to dollar cost average into the market every month. So to move away from that and buy individual stocks opens me up to a whole new world in terms of risks. "Real" risks like permanent loss of capital, poor stock picks and underperformance, but also the human nature risks, fear of missing out, getting excited by emerging trends, biases and blind spots. To try to keep myself honest and focused when I'm buying an individual business it's with the view of trying to beat the market, otherwise I'll just buy the market. Whether or not I'm able to meet that objective is another story altogether, but if that is my goal it helps me focus and not get too ahead of myself. Thanks again for your insights, especially the last paragraph, long term wealth at the expense of a lifetime of happiness is not a trade I'm interested in.

I'll double down on that @actionman -- the biggest determinant to wealth creation is the savings rate, not the ROI. Of course, both matter, but for a young person who wants to get a head, the focus should absolutely be saving as much as possible.

It’s far better to save aggressively and earn mediocre returns than to chase high returns on a tiny amount of capital. A 10% return on peanuts is still peanuts.

Still, I do think it's reasonable to aim to beat the market (whatever that happens to be) as a stock picker -- otherwise what's the point? Just buy an ETF and go fishing. That being said, as with most people here, I do get an immense amount of satisfaction and intellectual stimulation in the process itself. And would still be a stock picker even if I had a billion dollars.

@Lewis , some very good advice below. i would add the following as someone closer to the end than the beginning.

1. Compounding works (spectacularly well) but needs patience and discipline
2. i have usually run with aggressive asset allocation (equities) but with conservative stock selection ie quality. That has worked well for my temperament, as I am able to ride the volatility, fully believing in the strength of my holdings
3. The biggest destroyers of wealth have been a. divorce 1 and b. divorce 2 (divorce is worse than it appears because it reduces compounding capital but leaves the stay in business expenses (ie greater than 50% impact).c. i had an "entrepreneurial" business partner that changed the s/h agreement, and my equity disappeared (bigger loss than the two divorces combined)--note to self, deal with quality people. The best quote came from my accountant, who said to me, Mate i know you are upset about this, but every day we get minority s/h's in this office where the majority s/h has changed the rules and bought them out for a dollar and said sue me. --sort of helped. d. if you are going to be an active investor, be active--do the work, don't ignore or get too busy, lazy or whatever. it is a tough game, and you don't want to rely on luck.

so a mix of warnings and positives from me. good luck

Thanks @Solvetheriddle, there is a lot of good stuff here. I can see myself coming back to this thread periodically and checking in. I think different parts will resonate at different times. It's good to know you're still in the game despite some setbacks.

Love it @actionman & @Strawman

I used to say to clients' when I was an adviser that the "X factor" in determining your financial success is not the markets, because they will do what they do, but it's your investing behaviour. That's why many people fail, because they can't be arsed doing the work.

Save more than you spend. Start saving yesterday & set it up your savings plan automatically so you're not tempted to skip a month or two to buy something with low economic utility.

One of my favourite life quotes (about happiness) , which I'd like to claim is my own but it isn't....True wealth is time freedom!

Great discussion! I fully retired at 53, and have, in flight terms, reached “top of descent” and am now descending gradually in retirement. My perspectives on wealth and investing has since changed quite drastically. Once employment income stopped, it becomes instantly clear that wealth, investing and financial management are completely and totally intertwined that it is quite hard to separate between these and park them neatly in boxes. So here is my view on all 3 areas, more relevant for a “further down the track” time period:

Having lived it fully these past 2+ years, I completely agree with @Rocketrod - true wealth is absolutely about time freedom. I would add “.... and being able to use that time freedom every day in a meaningful and purposeful way”. Having time freedom as an absolute thing is no good if that time is not used purposefully when you have it.

It was paramount to clearly understand how much spend I will roughly need each year for the rest of my life, and how I will fund that spend each year. “Funding” means some combination of divesting assets, sell down of shares, super withdrawals etc. This was a sobering "calculate-my-intrinsic-value-like" exercise. My definition for financial wealth has changed to “having enough financial resources (employment or non-employment related) to fund the spend required until end-of-life (EOL) AND leave something > zero in my asset and bank balance at EOL for the kids”. 

There will come a point where more financial wealth does nothing and is no longer the goal to strive for. I pulled the pin on employment permanently when I realised that every extra $ that I was slaving to earn from work would do nothing to improve my now well-defined retirement lifestyle, but would merely provide funding for age 85 onwards or add to my estate, whichever came first. This is not about being "rich", but more about having "enough".

This has forced me to flip my employment-period mindset of “accumulate more financial wealth” to a retirement mindset of “gradual drawing down of previously accumulated wealth to replace employment income” in an investment and tax-sensible way. It is key to take a "dispose all assets" mindset and move away from the default “accumulate/hoard” mindset that I was conditioned to think during employment.

Maintaining “operational” financial discipline is still key. Keep life simple, always know where your money goes, spend within your means, do not stinge but focus on value. I review and tweak my Income and Expenditure and cashflow plan monthly and do a bottom up 12M budget annually.

Having worked out what my cash flow plan is to EOL, my financial goal has changed to “finding ways to distribute financial wealth to my kids earlier, and in smaller doses, rather than them waiting for my EOL” (I tell them that truth be said, I am more valuable to them dead than alive ...).

The above has not changed my investing mindset and approach at all. Am still striving to find and invest in the best companies, manage the portfolio to minimise risk, time in market, long term mindset etc. Despite being “retired”, there is potentially still another 20-30 years of life ahead, so a long-term growth investing mindset is not only completely relevant but a necessity.

I think my implicit investing goal for my SMSF is to consistently, and at least, better, my risk-free rate of return I get from parking cash in my offset account to reduce my mortgage interest, essentially the mortgage rate.

With no safety net of employment income, I have to balance/fine-tune between (1) having sufficient cash funding for at least 18M, earning mortgage rates in my offset account (2) dividends (3) forex movements for overseas assets (4) planned share sales to raise funding vs holding on for more gains (5) optimise the tax bill and (5) ensuring ongoing capital gains. Hence my upfront comment that investing and my personal financial management are now completely and totally intertwined.

In essence, I manage my personal finances and invest in exactly how I expect my companies to operate/perform: (1) Maximise revenue/ROI to earn above risk-free rate returns (2) sensibly minimise expense (3) ensure positive cashflow at all times (4) optimise tax exposure (5) minimise capex which hits the Income & Expenditure and cash flowbottomline immediately, and lastly (6) no stupid M&A's of any sort - it destroys wealth!