Fortune Watch

Once again, investors are in a manic-depressive mood. They undergo bouts of wild joy when they see where the markets are heading and how the value of their investments has increased. At the same time, they are sick with worry about whether they should stay invested and whether they should invest more.

The stock markets have reached higher than they have ever done before. This is a good thing for investors but is also a dangerous one. Remember, more bad investment decisions are made when the markets are at a high than at any other time. All-time highs may be exciting, but all savvy investors know that at times like these one’s thoughts should be on what not to do rather than on what to do.

We know it’s difficult to control one’s excitement, but this is the right time to get back to basics and reaffirm one’s knowledge and faith in the basics of investing. Here are some simple rules and principles that will ensure that you can prevent yourself from making the worse mistakes that the stratospheric heights of the stock markets can induce.

1. It isn’t different this time, not really:
Every bull run brings out the chronic optimist in investors. This time, we feel, things have changed fundamentally and the markets will go on rising up for a long time. Sure, we feel, they may pause a bit, but surely they won’t fall ever again. Every great bull run that the Indian markets have seen in living memory has come complete with a set of reasons ‘proving’ why it was different this time.

2. Bulls are no substitute for knowledge and understanding:
As the stock markets rise, most people appear to need fewer and fewer justifications for investing. A couple of years ago, when the markets were down in the dumps, hardly anyone would make an investment without putting it under a magnifying glass.

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Greed and fear are the major players in the stock market. These two emotions are the driving force behind almost all market participants – Institutional mangers, stockbrokers, Investors, traders and yourself.

You might be saying to yourself that greed and fear will never get in the way of my trading, but believe it or not they will be. It is not something to be ashamed of. It is something you have to admit to, come face to face with, If you are to become a successful stock trader or investor.

What do greed and fear look like in the stock market trading arena? “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffet

Fear doesn’t form in a vacuum. It is a learned response to a particular event or probability. In the case of trading, when you have a trade that goes bad, the regret and frustration can carry over into the NEXT trade. Or worse, the fear is so consuming, that you don’t enter your next trade. This particular problem is fueled by the expectation that every trade you enter should be profitable. If you truly believe that, then here is an important piece of information for you – not every trade will be profitable!

Greed creates the opposite problem. With a couple of consecutive winning trades, the ego can enlarge and feeling invincible overcomes being logical. This will ultimately lead you to trades that you normally would not have entered.

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In simple economics, there is little distinction between savings and investments. One saves by reducing present consumption, while he invests in the hope of increasing future consumption.

Therefore, a fisherman who spares a fish for the next catch reduces his present consumption in the hope of increasing it in the future.

Most of the people probably have savings accounts with ATMs to access their hard-earned cash and be able to store away any extra cash in a place a little safer than a mattress. A few of you may even have some stocks or bonds.

Let me explain why while a savings account in the bank may seem like a safer place than the mattress to store your money, in the long-term it is a losing proposition! If you open a savings account at the bank, they will pay you interest on your savings. So you think that your savings are guaranteed to grow and that makes you feel extremely good! But wait until you see what inflation will do to your investment in the long-term!

The bank may pay you 5 percent interest a year on your money, if inflation is at 4 percent though; your investment is only growing at a mere 1 percent annually.

Saving and investing are often used interchangeably, but they are quite different! Saving is storing money safely, such as in a bank or money market account, for short-term needs such as upcoming expenses or emergencies.

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Although we don’t like to admit it, fear can often motivate our investment decisions. That’s understandable — the thought of losing even a portion of your savings can be scary. But unfortunately, fear can distort reason and sound analysis, causing investors to ignore both risks and opportunities of investing. It can also lead to “financial paralysis” — when an investor is so afraid of making the wrong decisions, they fail to make any decisions at all.

On Tuesday, February 27 this year, the Dow Jones Industrial Average dropped 416 points—the markets sharpest drop in three years. Two emotions—fear and greed—can lead to bad investment decisions

Here are some quick tips to help overcome anxiety and fear, and allow you to take control of your investment future.

Investing can be dangerous yet profitable endeavor. Many people have been burnt and decide not to ever invest again. This is the primary fear for investing in anything. They may give you excuse such as ‘I don’t have enough money’ or ‘I don’t know where to invest’. But the number one fear is always the fear of losing money. If a novice investor knows that he won’t lose money, he must have used all means necessary (such as loan) to buy as much investment opportunity possible.

Investing here can mean a lot of things from buying gold coin to real estate. There are several ways of how to reduce your fear of investing in common stock.

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There was a one hour interview on CNBC with Warren Buffet, the third richest man in the world who has donated $37 billion to charity. (The richest now is Carlos Slim and Bill Gates is the second richest.) Here are some very interesting aspects of his life:

1. He bought his first share of stock at age 11 and he now regrets that he started too late!
2. He bought a small farm at age 14 with savings from delivering newspapers.
3. He still lives in the same, small 3-bedroom house in midtown Omaha that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall around it nor a fence.
4. He drives his own car everywhere and does not have a driver or security people around him.
5. He never travels by private jet, although he owns the world’s largest private jet company.
6. His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis. He has given his CEO’s only two rules. Rule number 1: Do not lose any of your shareholder’s money. Rule number 2: Do not forget rule number 1.
7. He does not socialize with the high society crowd. His pastime after he gets home is to make himself some popcorn and watch television.
8. Bill Gates, the world’s richest man, met him for the first time only 5 years ago. Bill Gates did not think he had anything in common with Warren Buffet (other than money!). So, he had scheduled his meeting only for half hour. But when Gates met him, the meeting lasted for ten hours and Bill Gates became a devotee of Warren Buffet.
9. Warren Buffet does not carry a cell phone, nor has a computer on his desk.

His advice to younger people:

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Stay away from credit cards, Invest in yourself. He is prepared, however, and does so regularly, to outline general principles of sound investment. These have a consistent theme and can be summed up like this.

A. Money doesn’t create man, but it is the man who created money.
B. Live your life as simple as you are.
C. Don’t do what others say. Just listen to them, but do what makes you feel good.
D. Don’t go on brand name. Wear those things in which you feel comfortable.
E. Don’t waste your money on unnecessary things. Spend on those who really are in need.
F. After all, it’s your life. Why give others the chance to rule your life.
G Never invest in a business you cannot understand.
H Always invest for the long term.
I Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.
J If you’re doing something you love, you’re more likely to put your all into it, and that generally equates to making money.
K Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
L In the short run, the market is a voting machine but in the long run it is a weighing machine.’

I see a parallel here between medical treatment and investment advice. In both cases, the choice of expert is an extremely high-stakes decision. If your doctor prescribes the wrong course of treatment, you may not wake up the next day. An incompetent investment adviser may leave you unable to ever retire.

Investing to a lot of people is comparable to going to the doctor, you know you should but it’s kind of scary, so you put it off. Does that sound familiar at all? Well, the thought that should be even scarier is what may happen if you don’t start investing.

One of the biggest misconceptions about investing, whether it is the stock market, bonds, real estate is that you have to have a lot of money to do it, and you only do it so you can get rich. The truth is completely different.

The truth is, investing is something you do to secure your financial future and also build a retirement fund. Suppose you were downsized out of your job? Suppose your retirement is up in 10 years? By investing, you will be prepared to meet these new challenges.

That’s the real meaning behind investing, planning your retirement, not becoming a millionaire. I’ve found few of the biggest reasons why many people fail to get started investing in their financial future as follows:-

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Losing sleep over buying a mattress could be understandable; people are tossing and turning on potentially bad beds because they dread mattress shopping.

Now let’s take a look at losing sleep while investing. The recent events in the stock and bond markets drew everyone’s attention. No doubt you took a look at your investments and, perhaps, worried about one or two. Maybe, you made some changes to your portfolio.

Let’s take a look at your experience and see if there are some lessons to be learned.

Did you lose sleep, literally or figuratively, over any of your investments? This is the gut check measure of risk tolerance. Investing is not an emotional decision, it takes hard work and discipline, but if you worry too much about an investment, it isn’t right for you. One of the hardest parts of investing is keeping your emotions out of it (i.e., taking a loss or selling your “favorite” stock).

Emotion will only cause you to buy at the market highs and sell at the lows. But, did your gut tell you to sell anything during the recent market correction? Rule number one of gut check investing is: if you lose sleep over an investment, it’s probably too risky for you. How do you know? This brings me to the second rule of gut check investing.

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There are only two emotions in the market – hope and fear.The problem is you hope when you should fear, and you fear when you should hope. Sounds a little too smug, doesn’t it? What exactly does this mean? Loosely, it means that when a stock you are holding goes down, you keep holding it hoping it will rise whereas actually you should fear that it will fall more. And when an investment goes up in value, you do the opposite.

This is true for many of us. But fear and hope aren’t the only two emotions at play in stock investing, there are many more. Here’s the full list: doubt, suspicion, caution, confidence, enthusiasm, greed, indifference, denial, concern, fear, panic and finally, despair. Naturally, greed comes in only when markets are at the top. In the list above, the emotions before greed are the ones that are felt on the way up and the ones after greed are felt on the way down.

That’s why the investment pros often say in a mantra-like tone: “There is no such thing as a free lunch.”

The key to successful investing is not to avoid risk altogether but to recognize the risks you are taking. To avoid unpleasant surprises, do your homework. Nothing beats reading the prospectuses and checking the long-term performances of your investments. People rush into purchases even when they don’t understand what they’re buying, People do more research when they buy a refrigerator or a laptop than when they invest thousands in stock. (more…)

Beginners who are not aware of current trade investments and who don’t have enough capital to invest may face a lot of setbacks. These factors, however, should not discourage an individual from investing. If you are too scared to take the risk, you lose a lot of opportunities.

Investing gives you the leeway to increase your income. If you just simply put your money in a savings account, a 2-5% interest will not do to secure your future. Since in this set-up you can easily pull out your savings account, it increases the likelihood of you spending the money in unnecessary expenditures. In a short span, your money is gone and that leaves you with nothing.

Lay down the cards. For beginners, the first thing to do when you plan to invest your money is to have a reality check. To start off, do you have a capital to invest on? It is not just capital but do you have a risk-capital?

Add up your assets and check which of these you are willing to bet and let go. This may be hard at first especially if all of which are valuable to you. But if you carefully choose which assets are of lesser value to you, this will make it easier for you to accept loss if your first investment fails. Since investing is also an expense, consider it a loss anyway but with a potential to grow.

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Market corrections are inevitable and healthy. Stock market corrections can be excellent opportunities to purchase common stocks at bargain levels. Veteran stock investors are not seeing anything in this turbulent market that is particularly unusual.

The fact that this market roller coaster is being pushed by a credit crunch instead of surging inflation or some other economic disaster doesn’t change the need to take a deep breath and sit tight.

Corrections, pullbacks, or whatever you want to call them are a natural part of the market cycle.

If you take a look at the past, there has never been a correction that has not proven to be a good buying opportunity. It has taken an average of less than three months for the market to make up those corrections, which is why most veterans plan to ride out the bumps.

When the market begins its return to normalcy, you don’t want to be on the sidelines. The secret to wealth has always been to “buy when there’s blood running in the street and sell when everyone is pounding at your door, clawing to own your equities.” You must have enough faith in yourself to buy when the rest of the market is selling.

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