(Seven) 7 life lessons on how to become a good investor

 

In investing, do not buy or sell based on what your friends, neighbours or that fancy stock guru is buying. You do not know their realities. You do not know their risk appetite, information ratio, manoeuverability, asset allocation and incentives. Actually you know nothing about those you wish to imitate. Robert Cialdini described this behaviour as ‘social proof’. It is the tendency to see an action as more appropriate when others are doing it. It may not always be the best for you.

Do not be in a hurry to grow up. You are always asking when you will get independent, when you will make money, when you will be involved in discussions we adults take part in. Some things take time. Growing up is a process. Enjoy it. Your science book explains how a seed turns into a sapling, then into a shrub and later into a tree. Some seeds wither away, not all turn into a tree and bear flowers and fruits. We nurture, support, love and sometimes admonish you—it’s all a part of growing up. You may not realise it, but at every stage you have a set of responsibilities, independence and authority. If you keep comparing yourself with us grown-ups, it will only add to your misery.

As an investor, do not be in a hurry to see your investments grow. Investing is a process. It is not a journey towards building an X amount of retirement corpus, but a journey to achieve financial independence. The sooner you achieve it, the better. Not all investments will pay off. But all’s well if it ends well. Worrying over every investment and why it went right or wrong will only make you miserable.

Do not wile away your time. All play and no work got Jack nowhere. Remember the ant and the grasshopper’s story? The one about the ant that worked tirelessly through the summer while the grasshopper played, sang and danced, only to learn the value of hard work when winters arrived? I want you to twist the story a little. Be the ant many times but do be the grasshopper sometimes. The fine balance is difficult to achieve, but then who said life was easy? Also, don’t be careless.

Likewise, in investing, average investors can only earn a finite amount. There is no substitute to growing wealth but by saving more. Do yourself a favour, watch two bad movies less in a month, skip an expensive meal at times and put that money to good use. Take care of your money, because if you don’t, no one else will. Rihanna filed a suit against her manager for swindling her cash and he had this to say, “Was it really necessary to tell her that if you spend money for things you will end up with things, and not money?” Pretty much sums up all you need to know. Things don’t make us happy, experiences do. The trick is to not get off the Hedonic Treadmill at once. Keep reducing the speed and some day you may not feel the need to be on it at all.

Do not get too attached and emotionalabout your friends, mates and belongings. It only hurts. People who you think are your ‘friends’ will change. Situations will undergo a metamorphosis. Let go. Destroy cherished ideas by confronting them. Be honest with yourself if not with anyone else.

Similarly, do not fall in love with any of your investments. The environment will change. Views will change. Stocks, sectors and asset classes which gave fabulous returns in the past may not do so in the future. Confront your realities. A friend, who has made tremendous money from real estate in the past 15 years, is still in denial. He still thinks it is the best place to make money. Maybe he is right, but if only he was a little more open to other investment ideas, he would not be stuck with illiquid assets. We have heard stories about dud stocks turning around, but some stocks will never get back to their glorified prices even if the index peaks.

Do not disrespect anyone. Respect not only your parents or grandparents, but also your teachers, your extended family, maids, drivers and every person you come across. It is idealistic, but at least try. This beautiful aphorism by a Jesuit priest Baltasar Gracian—“The wise are the least tolerant, for learning has diminished their patience”—is true. At this age you are far from being wise, so learn tolerance.

When investing, respect the opinion of those around you. You can learn from anyone—that new intern in your office, the pantry boy or your fiercest competitor. Above all, respect markets. The day you are too sure of the direction the markets will take is also the day you can celebrate Fool’s Day. The best investors are also the most humble ones.

Success does not mean more medals or money. It is perfectly okay to come second in race, as long as you know you tried your best and are able to work harder the next time, instead of saying that you can’t do it. It is okay to feel stage fear while you are up there reciting Shakespeare as long as you stand upright and are ready to recite one more.

In investing, do not confuse success with a higher CAGR on your portfolio or with your ability to identify multi-baggers. To grow in life, you need to push yourself out of your comfort zone, but in investing, it is imperative to operate within it. A good night’s sleep is the best return on your investments. Never compromise on it.

Develop a hobby. It could be a sport interest, an art or a craft. It can act as a great stress-buster, especially when you are grown up and immersed in worldly pressures or pleasures. Going back to your hobby is like going back to the one you love. You may ignore it, exploit it, use it, abuse it but it stays with you and calms your riled nerves when you need it the most. Your hobby truly loves you back. So have one.

Some look upon investing as a science, some think it is an art, but I have always thought that investing is a craft. That is because it can be improved with practise. The finer nuances of investing may be known to many, but they are followed only by some. Investing will test you, your emotions, your strategies, your best laid plans and ideas. It is only how you hone this craft and improve it every day that will set you apart.