Every game has certain rules and knowing the rules and following them is an essential part of playing it. The same is true for investing. There are hundreds of books on investing, which can help us with rules and tips for a better investing experience. However, there is a major obstacle we face, the human mind is not designed for investing and that is why following these rules is the most difficult part.
The investing game has two invisible opponents. The first one sits outside and acts like rust, eroding the value of money over time and is called inflation. The second opponent is the one who sits inside us and keeps instructing us all wrong directions as to its subject to emotions of greed, regret, sadness, joy, disgust, anticipation, and trust.
Investing is a game of storytellers. Stock markets owe most of their value to future earnings, which are merely a story. Storytellers draw the largest crowd and during such times the valuations of investments do not justify the ground realities. An active player is the one who focuses less on what has happened and puts more effort into figuring out what can happen and takes a bet. Like a game in poker, a good investor allocates higher money to an asset class when the odds of success are high. This requires a strong mental toughness as one has to act many times based on odds of winning rather than looking at confirmation from the crowd.
The game gives a lot of surprises and the only way to deal with surprise is to train the brain to deal with these surprises whenever they occur. One can do this by reading history and then apply these learnings while designing a portfolio. Think of this like a soldier, you know the enemy will attack, but the question arises when we are talking about the time of the attack.
It also helps to view this game like how an engineer designs a bridge. The bridge is designed to withstand the worst-case scenario. You need to “First Survive” in order to win this game. A good way to figure out a good margin of safety is by thinking about the times one has been terrified and desperate. Behaviour is very difficult to change; a good player designs his portfolio keeping his behaviour in mind. When a crisis hits, everything is put to the real test.
The game is not always fair. Markets do not care about your plans, allocations, time horizons nor does it have a memory of its past. It has a will of its own and it can continue to remain irrational for a long time. The trick to the game is trying to be consistently not stupid, instead of trying to be very intelligent.
A lot of us are on the treadmill of consuming information with a quick expiry date. This game is about having noise filters and thinking about the bigger picture. We stay in a world of information overload. A good player focusses on a framework and checklist method and documents the rationale of his investment decisions so that he can always refer back to it.
Like all games, the investing game is also about luck. A good player acknowledges the role of luck in investing. Instead of focusing on short term outcomes, the good player rather focuses on designing the right process which eventually leads to a good long term outcome.
We do not often think about how dangerous something can be until we almost die doing it. This game is about anticipation. One should learn to anticipate problems to prevent them from happening. This game requires second-level thinking. The most unfortunate thing which can happen in a game is getting a red card and you are out of the game for life. We must remember that anything multiplied by zero is zero. Today’s impossible is tomorrow’s reality. Negative interest rates, negative oil prices were considered impossible for most investing lives.
This game is also about taking it easy. Unlike other professions where working hard and burning midnight oil increases your odds of success, in the game of investing after you have done your homework, it is about sitting back and waiting for things to unfold.
This game is about patience and giving time for the portfolio to grow. The biggest limitation on a human mind is its inability to understand the exponential nature of compounding. In the formula of compounding, time plays the biggest role in wealth creation. When it comes to investments, time is the best fund manager.
Lastly, this game is about effectiveness. Your family is not concerned with how much returns or how many multi-baggers you have in your portfolio. This game is about fulfilling every financial goal with the least amount of stress.
Lastly, if you are not enjoying it, it is not worth playing it.
The author is AVP, DSP Investment Managers