In the world we live in today, most people strive towards being financially secure. This requires you to do 2 things.
- Firstly, save sufficient amount of your earnings over long periods of time.
- Secondly, have the courage and conviction to stay invested in classes that beat inflation over time. Both requires some effort, but most people know what needs to be done.
The real challenge, after you know what needs to be done, is all about conquering your emotions. If you can understand yourself and conquer these emotions, your chances of being financially secure early in life will be much higher.
At the other end of the spectrum is when Fear starts to control all investor choices. The investor starts to get excessively worried about losing capital. Doomsday scenario is the most dominant in the investor’s mind. As a result, all incremental allocations go towards asset classes that don’t beat inflation.
At the top of bull markets, Greed overrides many investors’ decisions. People start to assume making money in stock markets is fairly easy and people expect to make superior returns over time. In general, when 20%-25% pa return sounds easy to even the amateur investor, one needs to get worried. Talks of multi-baggers become the norm.
In such times, people tend to take on very high levels of risks, start to speculate and put in excessive capital at risk. Losses normally follow and many investors have seen significant part of their wealth get wiped out. More wealth is lost when greed overtakes you, than in any other periods.
At the other end of the spectrum is when Fear starts to control all investor choices. The investor starts to get excessively worried about losing capital. Doomsday scenario is the most dominant in the investor’s mind. As a result, all incremental allocations go towards classes that don’t beat inflation.
It gets worse when the investor sells down his larger holdings, at times at losses. Most of these investors will not participate when markets recover and they will be too late when they actually get back into ‘inflation beating’. One may not lose out dramatically, but would land up really missing out on opportunities, as they let fear rule their emotions. Such choices significantly increase number of years you need to work in order to become financially secure.
Best investors are those who work on refining their intuition. This requires the investor to educate themselves on long term trends and train themselves not to ‘panic’. You will notice such people in various aspects of life – say a good sportsman or even a sensible driver on the road. They tend to stay calm, have a long term plan and don’t let emotions like Greed or Fear decide what they should do.Such investors, generally tend to have a well thought out longer term plan and spend much of their effort in thinking through the plan. They surround themselves with people who can stay calm and learn from them. Learn to control your extreme emotions in order to become a good investor.