When it comes to investing, there are some important points that we need to keep in our mind. These are not the points to keep in mind only while investing or only while starting our investment journey, but should be remembered by us all along our investment journey (in fact all along our life).
I would like to give a small disclaimer here that the below mentioned principles of investing are not the exhaustive list, but will somehow help you while investing and preserving your hard-earned money.
- Compounding is a slow machine, but a sure machine – It works well only over a longer period of time. There is no substitute for time in compounding. So an investor needs enormous patience and conviction to hold stocks or mutual funds for 10 years or 20 years or even beyond this period to reap the benefits of compounding in the stock market.
- Why not all investors get rich in the stock market? – Actually all the investors invest in the market with the ulterior motive of getting rich. But the problem here is that, they like to get rich without going through many years of discipline and patience. Process leads to outcome.
- Don’t Attempt to Time the Market – Markets tend to sprint ahead or fall behind – they rarely seem to be in balance. Overvaluation or undervaluation can endure for a long period. Hence as said in the previous point, just follow the process, results will automatically fall in place.
- It is simple to buy and sell, but it is harder to hold on through ups and downs in the market. But ultimately this is the most rewarding path in your investment journey.
- If someone keeps checking the worth of his house every day, we may believe he has a mental illness. But that’s exactly what we’re doing with our stock investments.
- Sometimes Doing Nothing is the Best – I am not quoting any TV commercial here, where a boy does nothing and saves the old grandma! But I am just emphasizing the point that 99% of the time, doing nothing is the best thing to do in the stock market. Hence sit still on your investments and do nothing.
- You Cannot Predict or Control Markets – What you can control is how much you save, your investment process and your behavior. Focus only on the things that you can control (Free advice: Even try not to predict or control your wife, as it’s more harmful than the markets!!).
- Strange Investor Attitude – We view previous downturn markets as lost opportunities. However, imagining future downturn markets is unpleasant as well. So do not overthink either about the past or about the future – just concentrate on the present.
- Invest on a regular basis – Tiny droplets of water combine to form the vast ocean. Make long-term investments. You have the potential to amass enormous wealth.
- Why stock markets are not fully efficient – The simple answer to this question is that – Investors are Human, and that’s why markets would never be fully efficient, as at the end of the day, it is we humans who run the markets.
- Prices Change Regularly – Value changes over time. Hence when the value rises over a period of time, long-term investors will have an opportunity.
- Avoiding equity is riskier than investing in it. Remember that you must outperform inflation in order to keep your purchasing power.
- A weak investing strategy that you can persist with is more likely to deliver good returns than a fantastic one that you can’t keep with.
- Equity investments are prone to market risks, but those are temporary risks. The real risk in the market is your behaviour risk. Hence always keep a check on your emotions while investing.
- Finally, Start early – You should start investing early in your life while investing in the stock market, so that you can reap the full benefit of compounding of your wealth. If you have not started early, then the next alternative is live long in your life. I would like to quote here a small example of the famous investor Shelby Davis (as everyone would have already known about Warren Buffett). Shelby Davis is regarded as the second most successful stock investor behind Warren Buffett. Shelby has a remarkable 5 decades of successful investment. He began investing at the age of 38, with $50,000. He died at the age of 85 with $900 million in fortune acquired over nearly 5 decades at a 23.2% annual return.
Hence, this story demonstrates that starting late is not a major disadvantage if you live a long time!
