Contrary to what the title may suggest, this article is neither about psychology nor spirituality. I don’t understand either – too heavy stuff for me.
Instead, it’s all about your and mine day to day endeavours in the stock market; and learnings from those.
Read on. It will make lot of sense and you will surely be able to relate.
Stock investing is a very unique activity as no one can guarantee a set formula to success.
Initially we think analytical skills are the key; then we realise the importance of emotional control; and then we keep trying to balance between the two.
- Analytical skills relate directly to the intellect and are verifiable.
- However, that’s also the reason they affect us emotionally and therefore can play havoc with our investing discipline.
An example will make this clear.
After a detailed analysis, you have identified a multibagger. In excitement you circulate the name widely amongst your family and friends, waiting for them to be awed by your intelligence once stock moves as per the predictions.
Two possible outcomes –
- Stock price moves as expected – ego boosted; people shower you with love, but you become overconfident about your predictive abilities.
- It doesn’t – ego hurt; you try to defend why you can’t be wrong and it’s only a matter of time. In the process you have created unnecessary emotional turmoil for yourself.
(You may have the maturity to handle either of the two situations differently. However, in that case you are a rarity. Any seasoned investor will instead keep it simple and not share any tips; unless he is a professional investment advisor or is trying to front run the stock price)
With the backdrop of this interplay between analytical skills and emotional control, below are 5 self realisations that I believe are key to improve performance in the stock markets.
1. You don’t really matter
Irrespective of how much you may want to believe otherwise, you are just one amongst lakhs of others in the stock market. Markets will always be there – with or without you.
You are not the focus. God has no special eye on you. No one else is bothered about your positions or performance.
It’s important to realise this as it allows us to behave neutrally, calmly, humbly and individually.
2. Stop making predictions
Where will be Nifty at year end. Till when will interest rates increase. What will be the next qtr’s GDP growth.
All of us love to make these kind of predictions; mostly to get noticed and prove our intellect.
Does any of this really helps in our investing performance – No.
Reason – it’s impossible to predict them correctly on a consistent basis. So how does one translate them into the investment strategy?
Observing the broader trends and using them for investment strategy works far better, than trying to invest based on the exact macro variables.
3. Luck always plays a role
We mostly associate success with our intelligence and failure to luck.
Generally and especially in investing it should be the other way around.
Reason – it will save us from becoming over confident and keep us focused on the risk control.
The objective here is not to undermine the importance of intelligence but to accord an equal importance to luck.
You may have bought a stock based on the expectation of a superior revenue growth. The Company instead outperforms on the margins. As the stock price may still increase, it would be foolish to tom-tom about your intelligence and not thank your stars.
Stock investing is not a science, where there is a direct correlation between your intelligence/ hard work and portfolio performance. There is and will always be a luck factor involved into it.
4. Stop the show-off business
It doesn’t matter how many companies you have researched and can speak about.
The only thing that matters is your portfolio performance. Knowledge about more companies is no guarantee to success.
Your friends may get awed by the number of Companies/ Sectors you are aware about, but that doesn’t really help.
Infact it may become more confusing, time consuming and distracting.
You will start looking at things superficially and also venture out of your comfort zone/ circle of competence.
5. Say NO to Peer Comparison
We all have investing friends. We discuss our strategies and picks with each other.
Naturally, we track the performance of those names.
Some of theirs are bound to do well relative to ours. And that’s when our investing discipline goes for a toss.
We forget that their picks are as per their investing strategy and ours as per ours. The return expectations, the risk appetite, the holding period, the % allocation – everything may be totally different.
We can’t own every available winning stock. Out of the thousands of the available stocks, we only need few that meet our own investing strategy.
This acceptance ensures a much calmer way of participating in the stock market compared with trying to catch every available fish in the pond.
Stock investing is unique.
It is always saddled with too much noise and allows anyone to showcase his intellect.
This is a perfect recipe to get excited, lose self control and get into useless activities; impacting the investing performance.
Above article is an effort to try mitigate the lapses. I hope you could relate it with your own experiences.
Personally, I have realised that stock investing is a very boring and lonely activity and I should resist any temptation to make it exciting.
Other articles you may find interesting –
Every Stock has a Unique Character.. and it really matters !
Why waiting for correction rarely works in the stock markets
Excellent write-up Nitin. You have shared a very practical and rational viewpoint. It’s true in stock market as well as relatively true in other businesses or situations in life. I totally relate to it👍
Spot on, Nitin.