We want to speak the truth, and expect the same from others as well, but few of us have the courage to face and accept them? No matter where you are or what you do, if you want to be successful in life, you must face harsh truths of life that may be difficult to accept, but will help you in achieving success.
The world of investing is not different. Investing actually involves a large dose of philosophy, and that includes accepting certain truths, whether or not youre ready to face them.
There are seven investing truths that you need to be aware of. Embrace them, as theyre not just ones to remember when you begin investing, but throughout your investing life.
It is almost impossible to foresee the future:
No amount of number crunching can tell you with certainty, whether your investment will be a profitable one. No matter how hard you try, there are certain things you cannot predict,
What does it mean? It mean that when it comes to investing no one has a superior knowledge or an upper hand in investing. Does that mean all the efforts put to analyze the stocks is worthless, and its just a game of pure luck? Well, not exactly. Let me explain by giving you a scenario.
Lets say you need a driver to drive you around the city. Two drivers show up. One of them is blind but has never had an accident in his entire career. The other one has normal sight but has past record of few accidents. Whom would you hire? The blind one or the other one? The driver with normal eyesight does not give any certainty that there wont be any accidents, but it is still better than driving blindly. Similarly, analyzing stock does not remove uncertainty, nor does it provide any certainty of future returns, but it is still better than investing blindly.
You are not right because people agree with you:
You are right because you get the facts right. Belief is perception of masses. We all suffer from confirmation bias. If there is something that everyone agrees to, we assume it to be the right thing to do. Unfortunately, that is not the case with investing in stock market.
When the market is bleeding, fear of loss forces everyone to bail out to safety by pulling out all the invested money (or whatever is left of it). This is the time everyone thinks market is an unsafe place to invest your money. The truth is just the opposite. When the market is at its bottom, all the stocks, irrespective of how good their underlying business is, trade at a lower price. This presents a great opportunity to buy good stocks at a lower price. When the market bounces back, quality stocks outperform the market, but when the whole world is running towards cliff, he who is running in the opposite direction appears to have lost his mind.
Not all your stock picks will be winners, accept that:
Just because a business has done well in the past, it does not mean it will continue to well in the future. Market conditions change, business models no longer remain profitable, new technology may force many businesses to shut shop. There is no way you can be a master of stock picking, that is why an investor should always approach the market from a students perspective. If you make a mistake, instead of fighting it, accept and learn from it. That is the only way to become a mature investor in stock market.
Just because a stock goes up, does not mean it is a great investment:
When you see a magic trick, you always look at it from a critical point of view, because you know it is something not possible in real life as it defies rational thinking, common sense and logic. When it comes to investing in stock market, as long as the prices goes up, we hardly ever question the rationale behind it. We never ask ourselves Is the price rise justified by underlying fundamentals? is the stock appreciating because of good financial performance or is it just because money is flowing in, creating an asset bubble that may burst any moment? A stock that appreciates without justifying its underlying fundamentals, is bound to correct back to its fair price once the mass hysteria of speculators end.
Small costs become big expenses, Watch out for them:
As they say Beware of the small expenses because a small leak sinks the ship.
When you invest in stocks, small costs such as brokerage taxes etc may not look like a big deal, but look closely, and you will find that they take a big chunk out of your profits. That is why it is always important to be watchful of all the expenses and find better bargains. Look for a discount broker, redesign your investment strategy so that it minimizes your expenses without having any negative impact on your profitability. Small expenses may seem insignificant in the short term, but in a longer period of time, they can significantly affect your profitability.
Investing is little about strategy more about psychology:
This is something really important that every investor must understand. Investing is more of a mind game than a number game. It may sound little strange to you but picking stock is not as difficult as it may look like. The amount of math needed to pick stocks, you get it all in your fifth grade. The reason why most investors fail to make money successfully in the stock market is because it requires lot of patience and discipline to be successful. It is not just picking stocks that will make you rich, you have to give it time to grow and be patient in the process.
You have to understand that a stock is a part ownership in a business, when businesses earn more and grow in value, the part ownership held by you grows proportionately. Since businesses do not grow overnight, it is unfair to expect your investments to grow in a short span of time just because you hold them. Once you have invested in a stock, be patient, and give the business time to grow.
In short, the secret of successful investing is not just ?in buying the right stock at the right price but in holding it and being patient with it, giving it some time to grow.
Instead of focusing on trying to predict the future, it is in favor of an investor to explore the true value a business brings to your money and make sure you get the best value for the price.