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Rules for Investing discipline


Many people think that the best way to invest is to fill it, shut it and forget it – and they are reinforced by the dramatic successes of people who found Reliance shares in their grandfather’s trunk or bought L&T in the last bull run and held on for dear life.

That’s all survivor bias. You hear only the good stories. Who tells you stories like – I found 25,000 shares of Global Trust Bank but they are worth nothing. It’s not good conversation at parties. So you hear of a few good stories and do not hear of the bad ones, so you assume this is the perfect way to invest.

It’s not. Buy and hold has been successful in the past only because stock markets have trended upwards. From 1982 to 2000, the US markets went only one way: up. In India, we saw a big boom in 1992 to Sensex 4K or so, a bust and then back up to 6,000 in Year 2k, after which there was a bust again, adn then back up to 21,000 before we’ve stopped here at 15K.

This is still higher highs and higher lows. We have not seen a period of stagnancy. The US meanwhile has sorta stagnated – from 2000 to now it’s barely moved in real terms (counting inflation). But in 1966 to 1982, the index had only moved downwards. Meaning, a 16 year period where the high of 1966 was only regained in 1982.

Current situations are quite like that too, we may have another long period of nothingness. What if it’s another 16 years? Buy and hold may have worked in the last 16, but will it work in the next 16? So what if it has worked over most of the last decade – if this next 16 years will be bad, it impacts you. It impacts your retirement, your children’s fund.

So learn a few basic discipline rules:

  • Cut your losses: put a stop point to how much money you can lose in a stock. And when you reach that point, get the hell out. How much? Well, for some people it’s 2% per trade. For others it’s 30% absolute on each investment. That’s for you to figure out.
  • Don’t buy when there’s nothing to buy: If you go to a market for tomatoes and you find only rotten bananas, will you buy them? Some people feel that when they have decided that money must go in equities they have to buy some shares right now. That is stupid. Find opportunities. It may take some time, and they may not be visible (who has the time to track everything) – but only invest when it’s a no-brainer.
  • Ride your profits: When something’s going well, stick with it. It’s always tempting to take your profits when they’re on the table. But the best profits are on a long term trend.
  • Don’t act on what you hear: Too many people feel the need to talk. They come on TV and the internet and spit out random theories on where you should invest and what you should do. Don’t just listen to them ; do your own research. I am one of these characters – so don’t listen to me, do your own research.

    But why do such people, including me, feel the need to educate you, or to tell you what to do? Because it satisfies their need to feel like a hero. And some of them earn their living that way – when you think they are a hero you will buy their random recommendations. For others it is a way to reinforce their own trading decisions – i.e. when they want to sell, they need to have people to buy, so they “recommend” the stock. Whichever way you look at it, it does not serve YOUR needs. In all probability you don’t know what your needs are, but you might be right for thinking it’s to profit on your investment.

  • Set a goal, and get bored: investing without a goal is like driving without a destination. It’s thrilling to know that you can drive. And you feel like you’re exploring something, learning something new. But once you realize that you have to drive everyday, it gets more and more boring until all you do when you drive is curse the traffic and long for the destination.

    Investing is like that; you set yourself a goal – a house, a car, a trip to Interlaken in Switzerland, that 6 month sabbatical to train for a mountain climb. Whatever. And invest so you get there. Because investing is boring, and it deserves to be boring. The thrill is really in decorating that house, or climbing that mountain. The ride is going to be choppy so you have to curse the market, cut your losses, find those opportunities, curse some more etc.

    Btw, investment does not mean buying shares. It could mean spending time getting a part time degree so you get more pay and reach your goal. Or it could mean schmoozing with the top managers so you climb the ladder faster. Anything, that helps you reach a goal that you don’t have the money for.

(So what then, are my goals? I want to write a book, get fit, drive across the country, learn a musical instrument and travel like crazy. Somehow all of them are linked to a certain quantum of money I must have. And somehow I’m too lazy to even start any of them, even if I had the time or the money. I’m a hypocrite. But working on it.)

Lastly, my free advice. Don’t take free advice. It’s never worth the money you don’t pay.


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