Developing Habits of Highly Effective Investors …
The world of stocks is a highly dynamic one. One has to constantly be on his/her toes in order to keep abreast of the latest developments taking place. To a layperson, it can be intimidating, with stock prices constantly changing every second.
Of course, we have seen during the (in) famous market crashes that can happen when things do not go according to what the markets expect. When unexpected events and their sudden impact on stock prices make even the most experienced among us quiver, imagine what the common investor must be thinking!
However, I am of the belief that certain simple investing habits, if inculcated well into one’s behavior can make one’s investing experience more comfortable and rewarding..
In this write-up I shall restrict myself with stock market investing. As such, the term ‘investing’ used in this article will simply imply investing in the stock markets. Let us now take a look at some characteristics effective investors possess.
Begin with the end in mind: Investing, in its broadest sense, is one of the most basic and important processes of preparing oneself for meeting future financial needs like child education and marriage and retirement. And stock market investing is no different. It has to be followed like a process with an aim of achieving your future financial needs. Started early, and done in a systematic manner, investing in good quality companies can help an investor generate good returns over a long-term.
Think ‘risk-risk’: In making an investment decision, apart from returns, there is one more very important factor that should weigh heavy on your minds — risk.
Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns. A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn.
However, what stock buyers generally fail to understand is that, apart from these external factors, there is one very big ‘risk-factor’ that is very inherent (or internal) to them. This internal risk is that of ‘indiscipline.’
By indiscipline, we mean that stock buyers tend to forget the basic scruples of safe and sound investing, as they are then lured by the high probability of earning ‘a big bang for their buck’. And this leads to even the best of investors putting their money into the worst of stocks believing that their invested company is the ‘next big thing.’
Sharpen the saw: This is one of the most important habits of the ones mentioned in this write-up. ‘Sharpening the saw’ or educating oneself well about a potential investment before actually making the same is what determines whether or not the invested funds are destined to earn appropriate returns over the long-term. A good investment decision is made on the basis of a solid groundwork and research.
Understand your ‘margin of safety’: Understanding the concept of ‘margin of safety’, is very essential while investing in stock markets. For stocks, the margin of safety lies in an expected ‘earning power’ considerably above the interest rates on debt instruments.
However, having a stock with a high margin of safety is no guarantee that the stock buyer would not face losses in the future. Businesses are subject to various internal and external risks, which may affect the earnings growth prospects of a company over the long-term. But if you have a portfolio of stocks selected with adequate margins of safety, you minimize your chances of losses over the long term.
Be proactive: Being ‘proactive’ means taking responsibility for everything in life. When you are reactive, you blame other people and circumstances for obstacles or problems.
Being proactive has been one of the most striking characteristics of successful long-term investors. By being proactive, an investor takes charge of his investments after he has made them, by reviewing his decisions at regular intervals. Blaming others for the ‘tips’ gone wrong might lead you nowhere.
The list of habits mentioned above is not exhaustive. There are a few other characteristics that differentiate successful investors from the not so ones. Understanding businesses and financials of companies are other important links to a successful investment venture.
The habits mentioned above have to be nurtured and honed over a period of time. I believe that these will help you in the pursuit of creating financial wealth for meeting your future financial needs and responsibilities.