There are many similarities between facing paper losses on our investments and diving in strong currents. Weather conditions can vary widely but fundamentals remain the same -- be prepared before you dive (into the sea or investments), make sure you can swim well, stay calm and regulate your breathing, be aware of your surroundings and follow your navigation tools. I don't dive but I did pass my dive test to get an open water diving "license".
Personally, diving isn't my cup of tea. I was a good swimmer so it was very easy for me, but I didn't feel attracted to the sport. Investment, on the other hand, had a strange appeal. The satisfaction from being able to "forecast" made me feel like a prophet. In reality, there was no prophet, just lots of analysis and number crunching which anybody determined enough could derive.
To share a benchmark measure of my threshold for boring activities, when I was in secondary school, I completed my maths ten-year-series (TYS) twice. I can spend a weekend just reading a 500-page novel. I can drag myself to swim everyday so that I can reduce my sprint time by 1 second.
In investing, patience is a virtue. All things equal, the most patient usually ends up as the biggest winner. When one is patient, one is usually able to be calmer than others. When one sees a shark approaching for the first time, the one who is calm and can recall prep drills probably has a greater chance of survival. In investing, when one sees steep market corrections for the first time, the one who is calm and can recall textbook analysis of market corrections and crashes has a greater chance of not losing money. It's ok to earn less, just as long as you don't lose more. Never lose money unnecessarily. So if you are impatient, it is still possible to be calm and survive as an investor.
Everyone needs to weather a few crisises. The experience enriches one if one chooses to be enriched by it. Although I had only weathered through the SARS, lehman and 2009 crashes, I would say that staying invested and continuously studying companies when everybody said the markets were crashing like never before made me aware of the need to hold cash and be on a constant look out for value investments. If you were caught with your pants down, just make sure you have your pants more securely fastened in the next crisis. Constantly sitting out of the market will breed more fear and lost opportunities to learn how to weather storms.
Being prepared before one even starts investing means having cash, having your shopping list ready, being aware of the economic situations around the world. Being prepared also means being able to resist temptations to spend money that is sitting in the bank and ignoring the salespersons at banks trying to convince you to part with your money. Every $1 adds up, even if it is just a cup of coffee. Money spent on investments should be money one can afford to lose completely because that is the worst case scenario.
Knowing how to invest isn't important. Knowing what you are investing in is the most important. Buying a plot of land in Texas that gives you 20% annual yield? Buying wines that can be resold at a profit after a few years of holding the stock? Buying a shares of a casino company? There is no right answer to how to invest. Our characters reflect how we invest.
Everybody knows how to invest. Every decision we make in our lives is an investment. We decide whether to spend $5 at a hawker centre or $20 at a restaurant. We decide whether to eat fried oyster or chicken soup. We decide whether to sign up for music classes. We decide whether we want to buy insurance plans and how much to be insured for. We decide the school we attend, the jobs we work at, the friends we hang out with, the families we marry, etc. Every decision is an investment of our time and energy and money with a corresponding return. The yield is then how much we get in return for the decision we make, tangible or intangible, our value systems kick in to calibrate a measure of yield to aid us in our decision-making process.
So before you rush off to buy a book on how to invest or how to be rich or retire early, stop and ask yourself how buying a book on how to invest will help you in your objectives. The money is probably funding the writer's early retirement.
Know what you are buying and spending on. Observe and look for businesses that are profitable. Before long, you will realise that every second in your life is an investment decision and that conscious effort to evaluate your actions will translate to a need to want to buy certain (profitable) companies. That's when you take action and part with your money. That's the conviction every investor needs.
That's when you realised that you are still calm when your portfolio is suffering paper losses. You know that dividends will still appear in your bank account every month because the companies you invest in have profitable businesses. Remember that stress is created when you don't know what to do or what will happen. To reduce stress, you need to have the answers to those two questions or just simply not be involved in the investing process.
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