A simple definition of investing is that it is the process of laying out money now in the expectation of receiving more money in the future.
In simpler words, investing is the transfer to others of purchasing power now with the well-calculated expectation of receiving more purchasing power in the future.
Even simpler, investing is forgoing consumption now in order to have the ability to consume more at a later date.
I would’ve made this even simpler, but then as Albert Einstein said, “Everything should be made as simple as possible, but not simpler.” 🙂
But isn’t “simplicity” what you as an investor looking for in your investment life?
Ask any expert his view on the latest sharp rise in stock prices and where does he sees the market going forward, and you may hear words like – monetary policy, fiscal policy, current account deficit, QE, shifts in Philips curve, inflationary expectations, interest rates, etc.
As an individual investor, I have little interest in such esoteric terms. I hope you are sailing in the same boat as I am.
But then, we as investors still need to make some decisions.
So how do you “simply” decide whether to invest in the stock market after it has risen by almost 10% over the past one month while you stayed out of it?
More specifically, what is the biggest factor in deciding whether you want to invest in stocks like Amara Raja, Blue Star, BHEL, and Crompton Greaves after they have risen by 25-30% over the past thirty days? (I’ve used these specific names just because some readers have asked my view on these stocks)
In fact, someone recently asked me whether he should invest in Kingfisher Airlines given that the stock has almost doubled from its lows of August!
What drives you in a rising market?
What do you think leads you to decide whether to invest in such buoyant times when everyone except you looks like a perfect market timer who invested right at the bottom and is now big time in the money?
If you think the answer is anything of the following…
- Your deep understanding of the business
- Quality of the business
- Intrinsic value
…you are wrong!
There is one – and largely one – reason most people (yes, including you and me!) invest in a market that has risen too fast and too soon. And that is…
How you “feel” as an investor largely depends on your recent experience in investing.
If you have been out of the market and have not participated in the profits others have recently enjoyed, you may be feeling a sharp pain of regret…
…like I am feeling seeing stocks like Blue Star, BHEL, Crompton Greaves, which I analyzed when they were 30% lower than their latest prices, but did not buy because I thought those prices were higher than the intrinsic values.
Of course, I am not feeling as excited on seeing my recent gains in Tata Motors and Tata Steel as I am feeling the regret of missing out on the “star” stocks. That is a funny way the mind plays tricks on us!
Regret is an emotion that, psychologists have found, provides considerable motivation to investors.
Envy of others who have made more in the stock market than you, is a painful feeling.
Like this scene from 3 Idiots shows – “If a friend fails, it’s painful. But if a friend ranks first, it’s even more painful!”
The real cause of pain that makes you feel a “loser” is not that you missed out on those great returns in quick time. The real cause of pain is that such a miss diminishes your own ego (“How could he and not I?” kind of feeling).
Now, if these people who made so much in the market were really smarter and knew better, then one really feels like a laggard.
Even if they were not smarter, just lucky, it may not feel much better.
One can always seek emotional comfort in the thought that it was just luck that made others more successful in the short term (which, by the way, is mostly true), and bad luck that accounts for one’s own lack of success.
But the envy of others’ successes just continues to haunt you, and this leads you to regret staying out of the market (or not investing enough) when it was rising like a flame.
The instant thought that occupies your mind in such “envious and regretful” circumstances is that if you can participate in just one more period of an advancing stock market – assuming it advances for another such period – that will help ease your pain of losing out the last time.
It’s then that you jump into buying stocks that have already risen 30-40% in 1-2 months.
Even if you think that the markets can go down and your stocks can take a serious beating, you feel that the potential loss will NOT be much more demoralizing to your ego than the failure to participate has already been.
As Robert Shiller writes in his Irrational Exuberance…
Although there are many other ways to deal with the thought that one is a “loser”, such as rediscovering the importance of being a good friend, spouse, or parent, or pursuing the simple things in life – it may well end up that the only really emotionally satisfying decision to make now is to get into the stock market.
Like it happened yesterday with me – instead of enjoying the movie at the theatre, I felt some pain having just seen the advertisement of ‘Sugarfree Natura’ and regretting not buying Zydus Wellness when it was 20% lower than the current price just a few months back, or when it was 60% lower when I had first met the management and had liked the story three years back!
Of course, since I have invested in some other winning stocks over the years, I occasionally feel the pride in these past successes. But the regret of not owning some bigger multi-baggers, while knowing that there are some close friends who have enjoyed their ride on such “jockeys”, sometimes takes me over.
Luckily, I realize these demons (of regret and envy) inside my head and have thus been fairly successful so far in not giving in to their provoking ways.
What about you? If you have missed out on the current rally, are you considering yourself a “loser” and thus itching to invest out of regret? (Please be honest!)
You see, it’s fine being a “loser” at times, until you are not losing your head!