Do you need to be an investor to be happy? No. Can you get rich without ever buying a single stock? Sure. Then why bother? Yeah, I thought the same.
But no matter how happy you are or how much money you make, there’s something that has been feeding off of your finances behind your back. It has a name. It goes by inflation. With time, the amount of money you have stored loses its value, its buying power bit by bit. To put it in perspective, what you could buy with a dollar in 2010 would cost you $1.27 today. That’s a 26.84% price hike in 11 years. While most countries target an annual inflation rate of 2–2.50%, the U.S. (6.2%) and India (5.56%) are in their own contest. It means if you are from any of these countries, that much of value your money is losing every passing year.
This is where the idea of investing can be useful. It is the idea of putting your money into purchasing items that appreciate over time. Although investing in the stock market can be among the most accessible options for investment, there are other options like hedge funds, real estate and commodities, and crypto. The goal here isn’t just to keep inflation at bay. However, it is also to increase your money by a certain percentage.
So what’s the problem here? Two words. Expectations. Speculation. Here’s what you need to understand without being judgmental.
The public is on the market with extreme optimism and a heightened sense of anxiety. Such investors are often prone to making poor and risky investment choices, resulting in them losing their hard-earned savings. Which, in turn, hinders even many from investing. However, high-net-worth investors are generally proficient in the fundamentals of investing and only take calculated risks.
Here’s what they know about investing that most of us don’t seem to realize.
If you want to beat inflation in the long run, there are enough tools and techniques to back you up. All you need to do is be humble, set aside your emotions, and follow some proven process.
You don’t have to be a genius to be a good investor
In the fourth edition of Benjamin Graham’s Intelligent Investor, Graham defines the term — and he makes it clear that this kind of intelligence has nothing to do with IQ or SAT scores. He even presents us with two examples.
One from 1998. Back when a battalion of mathematicians, computer scientists, and two Nobel Prize-winning economists lost more than $2 billion. That too, in a matter of weeks. And the second one is from 1720. This time it was none other than Sir Isaac Newton who lost £20,000 (or more than $3 million in today’s currency) months after profiting £7,000. Do these stories intimidate you? If so, don’t let them. I’m not saying you have to outsmart all these giants to survive the market. All you need is some basic skills. As Zweig puts it, “it simply means being patient, disciplined, and eager to learn; you must also be able to harness your emotions and think for yourself. This kind of intelligence, explains Graham, “is a trait more of the character than of the brain”.
So what we learn here is our success, and the failure as investors doesn’t rely on our I.Q. But on our emotional composure. Which, again, you cannot maintain if your very survival hinges upon the expected return on your investment. Over-optimism, nervousness, or desperation to earn money is the enemy here. When you take away these factors, investing is no longer as risky.
A loss doesn’t mean you lose all your money
This storyline about “you’ll lose all your money if you invest” is a cliche that comes from those who don’t know the market and mistake it with a double-or-nothing scam. Sure, you could lose money even after making the right decisions. But you’ll likely never lose everything, and good decisions will greatly reduce the losses you could potentially suffer. However, let me explain how we earn or lose funds by investing in the markets. Imagine that you’ve purchased go up or down compared the price you paid for it.
Profit: Now, when you buy a stock at a lower price and sell it for a higher price, you make a profit.
Loss: On the other hand, if the stock’s price spirals downward after your purchase and you sell it at that point, you will lose money.
Yes. We have tools like fundamental and technical analysis to detect potentially profitable developments in the market. Yet, there’s no way ‘predict’ it with 100% accuracy. That’s why investors are always prepared for the worst. Among their many fail-safes, the most reliable ones are:
Stop-loss orders: Through a stop-loss order, you are allowed to set a limit on how much loss are willing to take for that trade. For example, if you buy a share for $200 and don’t want to incur a loss of more than 10% ($20) on that trade, you can place a stop-loss order at $180. You can also book profit using stop-loss orders. Once the market price of the stock reaches a high, you can place a stop-loss order a few percentages lower. It will ensure your profit if the prices drop without killing your chances of riding the tide even if it rises even higher. Like any other tool, the effective use of stop-loss orders varies from person to person. However, if you know the basic principles, it will always protect you from devastating market crashes.
Portfolio diversification: “Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.” – Investopedia. While stop-loss orders can help you get away with minimal losses and handsome profits in individual trades, portfolio diversification is a more holistic approach towards risk management. Here, the idea is, even though individual stocks can sink, that’s not the case or the market index. Because of economic growth and continued profits by corporations, the market typically goes up over the years. That’s why investing is ideally a long-term game. The more years you spend in the market, the better off you are. And diversification is another measure that ensures your safe stay.
Investing prudently can support your long term financial independence
What most people get wrong about investing is they think of it as some get-rich-quick scheme. While, in reality, it cannot be further from the truth. Here, let me say it. Investing is neither the fastest nor the most efficient means to get rich. As a matter of fact, most rich people build their wealth as entrepreneurs, not from stocks. But what about Warren Buffet?
Yes. I hear you. Warren Buffet did make his fortune as an investor. But it wasn’t instantaneous. Far from it. As financial expert Morgan Housel notes in his book The Psychology of Money, “Buffett’s fortune isn’t due to just being a good investor, but being a good investor since he was literally a child. As I write this Warren Buffett’s net worth is $84.5 billion. Of that, $84.2 billion was accumulated after his 50th birthday. $81.5 billion came after he qualified for Social Security, in his mid-60s. Warren Buffett is a phenomenal investor. But you miss a key point if you attach all of his success to investing acumen. The real key to his success is that he’s been a phenomenal investor for three-quarters of a century.”
So if you are motivated by all those one in million, unverified overnight success stories, let it be your warning. The market isn’t a casino, investing isn’t gambling, and jackpots aren’t the norm here. It’s more of a process that is best suited for you when you have already gathered some savings as opposed to when you are looking for ways to earn money. For it takes either an overwhelming share of time or a shit ton of money to get crazy returns. The market is noisy, and the people investing in it are emotional. It’s far too easy for you to get affected and lose grip. If that’s how it ends up, you wouldn’t be the first, nor the last.