The Sensex was down 700 points yesterday. It’s down 250 points as I write this today.
Whenever we get days like this — like when the Sensex is down 500 points or more — my phone begins ringing with inquiries from friends and relatives.
They always ask the same question: “What should I be doing now?”
Even my wife has this question every time she sees the markets fall like this.
“What are you doing now?” she asks me.
You see, this is ‘not’ the right question to ask in such times.
The right one is: “What should I have done in the past to prepare for an event like today?”
The bottom line remains that investing is a proactive — not reactive — endeavour.
“But then, isn’t this a natural human behaviour – being reactive and not proactive?” my wife asks.
Indeed, it is!
You see, most of us are not particularly good at taking charge of our future, our health, our relationships, our career, our finances…our life.
We tend to spend our life reacting to events, situations and circumstances, rather than creating and shaping them.
We get overweight (and scared)…and then we make a decision to start an exercise program to get healthy (reactive).
We have a nervous breakdown (and get scared)…and then we decide to manage our stress and cut back on work (reactive).
We crash our car and nearly kill a child (and get scared)…and then we decide to drive slower and be more responsible (reactive).
We get caught telling a lie (and get scared)…and then we decide to always say the truth (reactive).
We make wrong investment decisions and almost lose everything in a crash (and get scared)…and then we promise ourselves to be sensible in investing (reactive).
Yes, taking a corrective action is always a good decision to improve our future…but it all should have been made before reality punches us in the face.
A life that is based on reactive decisions, largely made out of fear, is never going to be our path to our best life. But that’s what many of us do.
You see, being reactive is boring, frustrating, painful, and unfulfilling.
Being proactive is amazing, rewarding, and challenging.
In investing, if you respond to every jerk, every headline, every move of the stock ticker, you will be ruined.
That is not the way to invest, like it’s not the way to live life worrying over things that are out of your control.
Major tremors, like the current crash in stock prices repeat every few years. You know that!
So why be surprised by them?
So, what should you do?
The key is to be proactive.
And the best way for you to be proactive is to construct an investment plan that allows you to ride out these events without panic. You need a plan that anticipates such regular occurrences.
What this simply means is that whenever you invest, always keep a margin of safety – a buffer that will save your investments even when your stocks crash.
And how do you do this?
Simply by buying quality businesses at prices less than 60% of their intrinsic values.
In simple words, if a business’s intrinsic value is Rs 100 per share, and it’s a good business, you must buy its stock only when the price is Rs 60 or lower.
I strongly believe that you are capable of doing this for yourself without paying anyone a fat fee.
All it requires is a little intelligence, some homework, a bit of planning…and some change in your behaviour.
Be proactive, not reactive.
Choose and do…before you have to.