What does holding a stock mean to you and why does this even matter? Many believe that in the sea of options available, they just have to pick a few lottery tickets to score it big. Why put in so much effort and time in your analysis when in the end, it all still comes down to pressing the ‘buy’ button?
We desire immediate gratification without putting in the necessary hard work. We expect to see results by taking shortcuts.
It is a universal fact that the financial market has made many investors extremely wealthy, but the fact is that more than 90% of investors actually lose money in the long run. It is unsurprising if you think about how the financial market is structured. Brokers seem to work hand in hand with investors by constantly providing stock tips to be acted on. If you take a closer look behind the motivations you will soon realize that every time the investor buys or sells, the broker receives a commission.
In short, no matter what the situation, your broker gains.
Do not underestimate transaction costs as silent killers that will erode any form of returns you deserve to get.
In spite of all odds against them, there are still legendary investors who played fair and achieved market-beating performances since the beginning of their career. In this article, we will be giving you why you should still invest in the stock market and why most aren’t suitable for this operation.
You should be investing in the financial market IF…
1. You are seeking a consistent way to grow your wealth.
Stocks have provided investors one of the highest historical returns on average amongst all asset classes over the long term. If you know that you aren’t suitable to pick winning stocks, growing your wealth through investing in low-cost diversified passive funds like ETF is a viable option too.
You’d be surprised to know that by performing as well as the benchmark, you are doing better than 70% of all investors in the mid-term. Even more so in the long run.
2. You believe in value and patience
If to you, holding a stock represents owning a fractional interest in the company, you are participating in the growth of the company. You know that it doesn’t matter if the stock price falls tomorrow or the next month. You strongly believe in the numbers and story behind the company and that the prices will ultimately reflect its intrinsic value.
If this makes a lot of sense to you, the stock market may be the right place for you to grow your wealth.
Understanding how the stock market work and the best way to invest is only going to bring you that far. There are plenty of investors in the financial market who know about these principles and are much, much smarter than most of us.
So why do these bright individuals not end up making big bucks?
There is another component to investing and is arguably the more important aspect. That would be psychology. When it comes to it, all the great plan you have drafted may actually come to nothing if you are influenced by the allure of instant profits.
You shouldn’t be investing in the stock market IF…
1. You expect high returns by next week, month or maybe even the next year.
If your expectation isn’t adjusted accordingly, you will be extremely disappointed. Contrary to popular belief, the reality isn’t similar to what’s depicted in the movies. The majority is fixated on the minute possibility of earning 2 or 3 times of their capital in the short run while completely ignoring the inevitably scenario of losing more than winning in the long run.
After gaining 100% returns on your capital, a mere 50% correction will wipe out all the gains you made in that instant.
Capital preservation is of utmost importance. The market-beating returns will come later.
2. You can’t control your emotions.
It is normal for everyone to have emotions. Even the great value investor Warren Buffett has made his fair share of mistakes. However, the reason for his great success is attributed to his ability to reduce mistakes.
Having a framework and sticking to it will do wonders for your portfolio. The discipline and emotional intelligence demanded are far more important than the IQ. You just need an average IQ and an above average emotional intelligence to perform better than the average.
However, in spite of all precautions in place, some individuals are still more neurotic than others. Perhaps even after all the preparatory work, mistakes are still made at the point of execution. Adrenaline overwhelms the brain and impulses override rational thinking.
Recognizing this early allows you to steer clear of making important investing decisions.
3. Ego is important to you.
It is so important for investors to constantly admit their mistakes and improve. Individuals are prone to self-attribution bias. We tend to associate past successes with our own skills and failures to bad luck.
Investors who are too adamant that they are right all the time will end up destroying their portfolio. Charlie Munger, vice president of Berkshire Hathaway, has repeatedly shared the importance of lifelong learning to strive to improve.
If you are so fixated on your own ego rather than constructive learning, we assure you that you will plateau very soon.
From the above, you might have realized that the three undesirable traits are related to attitude, personality and mindset. We believe that the technical skills necessary to make the right investment decisions are very manageable but whether you will be successful is dependent on these soft skills.