I got an opportunity to watch a video of world chess champion Mr. Vishwanathan Anand playing a game against Boris Gelfand, the Israli chess champion. A particular aspect I noticed in both these champions is the amount of patience they apply with each move. Both of them didn’t rush to make a move upon their turn. More than talent, I feel the amount of patience they apply is the key for success here. Does the same theory apply in stock market investments as well.
Do I need to wait patiently in the stock market? Can I make quick money with selling or buying stocks quite often? Read ahead to understand the answers and the amazing discovery in stock market investing that will make you wealthy.
The Surprising Fact about Selling Stocks:
I am selling the stocks when the market goes down and save myself from a heavy the loss. What is wrong with this?
Say for example, You sell a particular stock just because the market crashed. Later you feel sorry for seeing the same stock going up after a market recovery. ‘Ok, I sold it in order to save myself from losing big money, what is wrong with it’, telling yourself and you go on with your routine. You are knowingly ignoring the fact that you have made a blunder of not keeping patience. The same happens while rushing to buy stocks without understanding the fundamentals of that stock. Isn’t a bad decision making?
Look at the anvil of the blacksmith, how it is hammered and beaten; yet it moves not from its place. Investors need to learn patience and endurance from it. You can have 100% benefits in the stock market only if you wait with patience. Remember the words from Jessy Livermore here. ‘The big money is not in the buying and selling…. but in the waiting’.
Active Vs Patient: One thing that separates winners from losers
Invest in a stock market, do nothing in between but wait and get the highest returns in 10-15 years. Is this a gimmick or a joke?
Not at all. There is a misconception of comparing stock market with a poker game. Those who want to make quick money, start investing on stock market without understanding the facts. Many go away from stocks thinking that they would suddenly loose everything they invest.
The reality of investing in stocks is totally different. Did you know the probability of losing your money in long term stock investments, say 10-20 years? It is zero, also you get a return of about 13-17% per year. You invest Rs.10,000 in Sensex or mutual funds now in 2013. By the end of 2023, the money you reap will be approximately Rs.1,80,000 which is 15% increase per year. Actively selling or buying stocks short term will make you a very poor investor. As the investment guru Warren Buffet says, ‘The Stock Market is designed to transfer money from the Active to the Patient’.
STOP taking Emotional Decisions and START taking Rational Decisions:
It is very tough for me to control the urge to sell or buy a stock when the market is fluctuating. How can I control this urge?
Is this your worry here? First of all, understanding how the market is designed will help in controlling the urge of making quick decisions. The stock market is so volatile and you can learn the trend only by looking at its history. The graphs, up and down arrows with some percentage given daily or weekly basis will not help in decision making. Look at how the market worked in the past 10-15 years. There were fluctuations due to various reasons like natural disasters, terrorist attacks, global economic fall-down, political changes and recession. Study how the market recovered each time it fell down.
Whenever you get the urge to take any short term stock investment decision, ask yourself these questions.
✓ Is there any change happened in the fundamentals of the stocks you hold?
✓ Why is the stock price going up/down? Is it connected to the performance of the company? What is the history of this company’s performance? How other companies are in the same industry perform currently?
✓ Why did I choose to invest on this particular stock initially? Is the reason changed now?
✓ Have I done enough research on this particular stock while investing?
✓ Have you considered the tax consequences?
✓ Are you selling because of the under performance in the stock or market or industry?
✓ Are you being rash, emotional or reactive?
✓ Is the stock undervalued or overvalued at its current price?
✓ Do you have the better use for the money after you sell?
Answering these questions will help to control the urge and make you wait for reaping the highest growth on your investments. Peter Lynch beautifully advices here. ‘Investors need to be patient. You don’t need a lot of action. You can lose money fast in the stock market, buy you can’t make it fast. It takes years to produce big results’.
In order to think long term investing, you decide what are all your short term financial goals and long term financial goals. Then you need to construct a financial plan which will help you achieve these goals. If you are serious about creating a financial plan for yourself, then you may want to check our financial planning process.
The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at [email protected]