200. Fear of losing a battle may be costing you the war (Building Finance Intuition Series)

#MakingBetterDecisions, #Goals,?#focusonwhatmatters, #Wealth, #Careers

“Grand strategy is the art of looking beyond the present battle and calculating ahead. Focus on your ultimate goal and plot to reach it.” ―?Robert Greene

Among other things, stock investing is also a funny business. Stock market is beguiling and it attracts a number of folks almost like moths to fire. As much as to a casual observer, even to many experienced campaigners, stock markets seem like easy places to make money. Simplistic but fundamentally erroneous strategies are generally popular among the newbies – e.g., buying penny or lowly priced stocks or buying businesses which may be trading at 52-week lows or buying businesses just because they are famous or ubiquitous. Many tend to enter stock markets at times when markets dominate mainstream news media and social chatter, that is, at times when markets are already high (and hence being spoken of everywhere). Whatever the motivation, na?ve investors typically end up losing money, perhaps, and quite likely, after initially buoyed by beginner’s luck. After initial losses, many swear off the stock markets, never to return.

I have come across one too many such, or similar, cases. I used to be one such case, too.

A few years ago, I finally wizened up to what really was ailing my financial progress – fear of moderate losses was keeping me from potentially extraordinary gains.

“Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.” – Peter Lynch

The method for making money in stock markets is actually really simple. Find growing companies which possess a clear competitive edge that can sustain for at least five to ten years, that operate in an industry with tailwinds allowing for a clear runway of growth for at least five years and whose stock is currently not overpriced. Other factors such as strong management with demonstrated integrity and reasonable capital structure are important too. It surely is not a trivial task to identify such companies but certainly it is not “technically” complicated too. With some experience and commitment and perseverance, one should be able to identify such companies.

Even so, a far easier and highly accessible approach for wealth creation is to invest in a small number of carefully curated equity mutual funds because identifying a good mutual fund to invest in is far, far easier than identifying a good stock to buy.

An even easier method for wealth creation is to invest in equity index funds. All it takes is to pick a broad-based index fund and invest in it through rain and shine and ensure that you do not interrupt its compounding journey for a decade or more. Not to say that this will guarantee wealth creation – there are never any guarantees in investment, but this way, wealth creation becomes highly, highly likely.

“I was taught the way of progress is neither swift nor easy.” – Marie Curie

If wealth creation is so simple and accessible why don’t most people become wealthy (to be sure, I don’t think there is any absolute benchmark for wealth – to each, one’s own) …

…because the journey to growth is anything but linear. It plays out as a series of dance moves involving few forward steps and few steps backwards. Only over a period of time, do you see any material progress becoming apparent. In “equity” investing whether done via stocks directly or via mutual or index funds, perhaps the toughest challenge is to hold conviction and be patient until growth materializes. As such, losses hurt a lot more than the pleasure from similar gains. So, over the period of time that you are invested, hurting from frequent but inevitable drawdowns and overcoming the mounting cumulative pain becomes very tough. But overcoming this is an essential requirement for succeeding.

The path to career growth, much like that for wealth creation, is also ridden with the same challenge. Growth typically requires successfully taking on untested responsibilities and/or riskier projects. You may not always succeed at such endeavours but when you do succeed, it may result in a step-change in your career progress.

"In investing, what is comfortable is rarely profitable."?— Robert Arnott

Not taking enough risk may ensure that you win your immediate battles but it could also cost you the war. Unless you risk failure and perhaps even fail a few times along the way, you may not discover your true capacity for achievement and growth (and suffering).

How far do you need to go in terms of taking risk?

Not everyone is capable of risking it all, at all points of their life – after all, there are few people like Elon Musk. But there is really no need for it. I believe that the key is to ensure that you do not take on so much risk that if the risk does materialize, you will be knocked out of the game. Risks, ideally, should be calibrated to your circumstances. You need not risk all your capital in stock market; you need not start a business or even look for career promotion all the time. You may want to invest only that amount of capital that remains after you have secured insurance on your life (if needed), health, vehicle and house and also set aside money for emergencies. You may want to ensure that you have a steady job before seeking growth. In case of starting or growing businesses, you may want to ensure that you have a clear value proposition that has been validated even if at a tiny scale before you quit your job or start seeking funds for growth.

This may help you to be in a much stronger psychological position to endure the inevitable short-term headwinds before the hopeful realization of long-term prosperity.

Bottomline

"He will win who knows when to fight and when not to fight." – Sun Tzu

What probably holds back most people from achieving extra-ordinary results is the fear of ordinary losses in the short to medium term. This fear of short-term losses sometimes manifests as innocuously as breaching “comfort zones”. Even writing a short article like this puts me out of my comfort zone. I struggle for clarity, coherence and flow. Sometimes, this fear may be about real, although small, hold-backs such as fear of career setbacks when taking a sabbatical to enrich personal life or even maternity breaks. Sometimes, it could be about “paper” or “virtual” losses such as draw-downs on stock portfolios. Whatever form they take, short-term losses tend to hold one back from adding extraordinary quality to their lives. Clarity of purpose may give necessary courage to overcome these fears.

***************************

Thanks for taking time to read this article. In this newsletter, I share my learnings that could help you improve your decisions and make meaningful progress on your goals. I try to share stuff that I have personally experienced or experimented with. If you find this newsletter worthwhile and if you do not mind it, please do consider sharing it with others.

To follow me on LinkedIn, click here

Making Better Decisions Newsletter on LinkedIn

Making Better Decisions Newsletter on Medium

?