Liz Ann Sonders’ Top 3 Investment Principles

Liz Ann Sonders is the Chief Investment Strategist for Charles Schwab. She handles strategy and research for their retail and institutional clients.

Over the years, Sonders has shared plenty of investment insights in her interviews with outlets such as the Wall Street Journal and Barron’s. Here are the top three investment principles we can learn from her:

Top 3 Investment Principles To Learn From Liz Ann Sonders

Lesson 1: Always Have A Plan

Sonders is a big proponent of having an investment plan for any market scenario.

She believes you must have a clearly defined strategy before placing a trade. Otherwise you’ll make impulsive decisions and lose. 

Now unfortunately, impulsive decisions are something investors fight against everyday. And the reason why they’re so frequent and difficult is because of our own evolutionary biology.

If we look at our history, a majority of our human existence was spent as hunters/gathers in a tribal lifestyle. Our brains developed within this environment over millions of years and are now hard-wired for it. 

Think back to our ancestors who encountered lions, hyenas, and other predators while roaming the Sub-Saharan plains… 

To counteract these threats, they developed a “fight-or-flight” response. 

Their brains’ amygdala would flood their bodies with feelings of fear and aggression along with hormones like adrenaline and cortisol when faced with danger. This prepared them to either fight or run. 

This fight-or-flight response is still present within all of us today. And while it’s useful in some situations — like when avoiding a car crash or removing your hand from a burning stove — it’s detrimental in others, like in investing.  

To our brains, large losses in a trading account feel the same as a lion attack in the wilderness. The same psychological and physiological changes take place. But in this case, they’re not helpful. We just freeze, panic, and eventually lose.  

The key to control this biological response is by implementing an investment plan. A plan allows us to transfer decision-making from our impulsive fight-or-flight amygdala to our relaxed prefrontal cortex.

A good plan will have specific action steps to take depending on the market situation with guidelines in place for when our emotions inevitably run wild. It’ll ensure that in the heat of the moment, our rational brain will triumph over our emotional brain. 

For example, as part of our team’s investment plan at Macro Ops, we only place buy and sell orders at the end of the day after the market has closed. 

This forces us to make decisions on closing prices instead of intraday swings so that we aren’t emotionally triggered by any market volatility. 

This simple rule has saved us countless dollars. It’s easy and effective. And it’s just one of the many benefits of having an investment plan and following it. 

Lesson 2: Understand Market Sentiment

Liz Ann Sonders frequently stresses the importance of understanding market sentiment. Here she is in an interview with The Motley Fool explaining the idea: 

“I think the reality is that especially at extremes, at major turning points, you really could point to sentiment more than anything else.”

Sentiment refers to how investors are currently viewing the market. Are they overly bullish? Overly bearish? Are they valuing particular metrics over others?

The truth is that sentiment is subjective and doesn’t always make sense. It’s just the sum of how the market (and the investors that make up that market) feel. It’s neither “right” nor “wrong”. 

Tulips in the 1800s, internet stocks in the 1990s, cryptocurrencies today — in retrospect, it’s easy to say all these were bubbles created by idiocy. 

And that may be true, but regardless, that was the prevailing market sentiment at the time. And to be a successful investor, you must be able to play that sentiment without falling victim to it.   

For a recent example, take the period between 2020 - 2021. This is a time when investors couldn’t buy enough high-growth technology stocks. 

These stocks weren’t judged on what we’d generally consider to be important metrics such as business model viability, unit economics, or any future semblance of profitability…  

Instead, they were purely judged on whether they could rapidly increase revenues. 

That’s it. Nothing else. 

The result was that these “high-growth” tech stocks saw their valuations quickly rise to un-godly levels. 

Slower growth companies on the other hand, ones that generated real cash flows, saw their valuations crater. 

Did that make sense? Of course not. 

But it didn’t matter at the time because the market didn’t care! Sentiment was geared towards massive revenue growth and nothing else. 

Now of course that didn’t last. Sentiment once again shifted in 2022.

In 2022 market sentiment started to demand that companies either generate profits now or have a reasonable path to profitability by year-end. 

This caused all the high-flyers of the previous years such as Shopify (SHOP) and Carvana (CVNA) to fall 70 - 90%. 

Sentiment changed and prices changed with it. The best investors during this time were able to profit off the high-growth tech trend while also seamlessly changing their strategy as sentiment shifted.

As legendary speculator George Soros said in regards to trading sentiment and bubbles:

“I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it.”

Lesson 3: Practice Patience 

Liz Ann Sonders believes that investors need to have patience when investing.

We agree and have found patience to be one of the most important characteristics of all the superinvestors we’ve studied. 

Now this sounds simple enough, but in practice, it’s much harder than it looks. 

There was a crazy study done a few years ago that revealed that most people would rather physically harm themselves than sit alone in a room and do nothing. 

Investors are the same way. 

We “harm” ourselves by being overactive in the markets. We're constantly making new, bad investments because we’re obsessed with the next “shiny thing”.

Now fortunately, there are ways to fight this urge to hurt ourselves. 

First, investors should set the highest-possible bar for new portfolio entrants. This means that you’re not buying a new stock unless it's miles better than your least favorite position in your portfolio. 

This keeps you focused on only the best possible setups and companies. You’re not wasting time researching B- ideas. Instead, you’re patiently waiting for the A+ fat pitches that you can really knock out of the park. 

Second, investors should only bet on their most asymmetric ideas. You want to find investments that have the highest reward for the least amount of risk — where you can risk $1 to make $10. 

These types of ideas don’t come by often. And that’s the point. They require tremendous amounts of patience to wait for and execute. 

Patience allows you to say, “I’m okay doing nothing because I know the right opportunity will eventually come along.” 

Now of course this is difficult… but that’s what’s required when we invest.  

Additional Lessons From Market Legends

If you’d like more lessons from more market legends like Liz Ann Sonders, check out our free “Trading Greats” report here.