The small town I was born in West Bengal gets occasional loud and wild mud storms. Growing up there in my early years, though, no one really freaked out about it, not even the people residing in small mud houses surrounding my house.
They had built their houses so strong that any wild mud storm was rarely a problem. And so was the attitude towards the storms, that it was hardly a problem worth getting nervous about.
The case with the place in Rajasthan where I grew up in my teens was different. Temperatures during summers peaked at 50 degree Celsius, and dropped to 5 degree during winters. But we rarely went crazy because we had learnt to prepare for both the extreme seasons.
Now, the weather where I have lived for the past 15 years i.e., Mumbai, is so humid throughout the year that people travelling from North India, who do not get freaked out about the extremes there, find Mumbai terrible. On the contrary, I find Mumbai’s weather much more comfortable than the extremes of the places I grew up in.
Most problems in life are like that. When we prepare for them and get used to them, they’re not problems anymore. They’re merely the way it is.
Investing in stock market is like that. For an investor who has seen various market cycles, and has learnt to live with them, a sharp crash isn’t a big problem. He is emotionally better prepared to face such situations than someone who is new to stocks.
Also, an investor who invests or manages his own money is better prepared to face such situations than someone who invests borrowed funds or manages other people’s money (and emotions).
Also, an investor who is investing for a 10-15 year period is better prepared to handle sharp stock price declines than someone who is either nearing retirement, or doesn’t have the required guts or patience to see meltdowns.
When you are looking to invest your hard earned savings in the stock market – whether for the first or the tenth time – know how well prepared you are to face short term corrections and capitulations.
The biggest edge you have as a small investor is your behaviour. Look at how you behaved during the latest stock market decline that started in late 2015. It should tell you a lot about yourself – whether you got nervous considering that the stock price declines were a big problem, or whether you got excited considering the problem was an opportunity.
If you haven’t figured out your temperament, the stock market is a very expensive place to find out. A long term view requires an ability to stomach extreme short term market volatility. If you can’t do that, you may want to move your money to other instruments like bank fixed deposits and liquid/debt funds.
As Jason Zweig wrote in his recent post on WSJ –
In order to capture the potentially higher returns that stocks can offer, you have to reconcile yourself to the certainty of horrifying short-term losses. If you can’t do that, you shouldn’t be in stocks—and shouldn’t feel any shame about it, either.
To repeat, when we prepare for problems and get used to them, they’re not problems anymore. They’re merely the way it is. Remember this, and you will make better, saner decisions in life…and investing.