“Chop Wood. Carry Water. Chop Wood. Carry Water.” Wu Li, Zen Mater
I understood early in life that you have got to increase your savings overtime to end up with enormous amounts of wealth. I never knew that behavior plays a large part in wealth creation that returns.
It has been only in the recent years that i have learnt the behavioral aspects of investing. The rules which define wealth creation. I have been very thankful to have been exposed to right set of books and people who continue to guide me to improve my thinking and help me to live a meaningful life.
This blog post has been inspired by Carl Richards and his book “The Behavioral Gap“. I have tried to sum up my learning in this post. All the illustrations are my own or i may have borrowed from the book.
Being Average Works
You really do not need to find the next hot stock. The next hot fund manager. Or the next hot mutual fund. All you need is an average mutual fund which can give you average returns.
How will you end up with wealth in this case? You hold your average fund for an extraordinary long period of time. Something which others cannot even fathom. Something which you have to experience yourself. Something which requires extraordinary amounts of patience.
There are no stock market geniuses. Just those savvy in controlling their emotions. You can never get wealthy if you let emotion get the better of you. But if you rein in your impulses, you have a very good shot at accumulating wealth – Parag Parikh
Focus on the One Big Thing – Time
There will be bear markets. There will be raging bull markets. But your destination will arrive when it has to. You have to stick to the plan despite the nature of the ongoing markets. Most times, inaction for sufficiently long periods of time works in your favor.
A happy person wants 10,000 things. A sick person wants just ONE thing. Desires are clouding your mind, be aware of their effect. Desire is suffering. – Naval
Stop Blaming Others
We tend to blame everyone else for the outcomes we experience. We blame our brokers for the money we lost. We blame our work for the weight we gained. We blame the traffic for not reaching to the meeting on time. We blame our parents for not buying us the right books. We always find someone to blame for our decisions.
Similarly in finance, we blame our investments rather than blaming ourselves. We chase the next hot thing and end up losing money. Who is to blame here? The investor or the investment. We all know that the indices have given good returns over longer periods of time. We still do not want to index our investments and take a chill pill and wait. Because inactivity sucks. It does not entertain us. Who will we blame for inactivity?
Ignoring History is Foolishness
Your experiences shape the outcome of your future. Or you could use the experience of people who have lived before you and use those to avoid mistakes they have done.
You know that Warren Buffet has survived for so many years on cherry coke and McDonald’s. You also know that he sat on his ass to read 12 hours a day and compounded his money for decades (for more than 6 decades actually).
You have got to learn and pick what would work for you and everyone. Cherry coke may have worked for Warren but it will certainly not work for largest number of people. Compounding worked for Warren and it will certainly work for you too. You have got to cherry pick from history.
What i have learnt is to ignore most of the things and embrace few big ideas. You really do not need to hunt for the big ideas. History can teach you everything, mostly. I am listing a few below:
Long-term compounding in investing.
Higher savings rate rather than higher returns for financial freedom.
Physical activity and avoiding junk in health.
Reading for sanity.
Minimalism for living a stress-free life.
Greed is a slow-poison. It will kill you one day at a time. It’s negative compounding at work.
Lower returns are ok. We are not here to win any race. All you have to do is be able to live a meaningful life and spend a lot of time with your family. This is what mostly matters.
Before you get killed, become aware and become humble.
Reduce your Risks to Lower than Your Acceptable Levels
The pain of losing anything is more than the pain of gaining, even winning a lottery. It is ok to miss out on gains if you can reduce your risks to acceptably low levels. Your risk profile is completely different from the risk profile of your neighbor.
First step would be to knowing what to avoid. Start with derivatives and drugs.
Align your Investing Strategies with Your Level of Fear
You cannot be an aggressive investor if a 10% downturn does not let you sleep well at night. Find your balance. The balance which lets you sleep well at night without worrying about tomorrow.
Align your investments with your long-term self. You never know what may hit your investments tomorrow. You do know that you want to sleep peacefully each night.
Know Where to Focus
I recently tried my hand at trading in cash markets. I was somewhat successful too. But i did not enjoy it. Because i was not able to justify the returns with the time spent. I was happy with lower returns from fixed income instruments. I valued my time more and knew that reading and writing would give me more pleasure. I was ready to forgo the extra percentage points.
Likewise, its essential in investing and life to know where to focus. Focus should be on return of money rather than return on money.
Less is More
Eliminate things which make you fragile.
Debt higher than your net-worth does not let you think rationally. More clutter means more maintenance. A small house, one car, few gadgets. More time to think. These things de-clutter your life.
You do not want to be a hoarder. Too many stocks in a portfolio means you are a collector and not an investor. Morgan Housel only owns the Vanguard total stock market index and Berkshire Hathway. How many of you can take the path followed by Morgan?
Fancy will not make you wealthy. Simplicity mostly will.
Seek things which actually matter. Money is only an enabler to live a good life. It should never become your life.
When most people say they want to be a millionaire, what they really mean is “I want to spend $1 million,” which is literally the opposite of being a millionaire. – Morgan Housel
Apples come from apple trees only
High costs do not mean high returns. The next hot stock will not let you retire. All you have got to do is accept that most hot things are a temporary fad.
Decide based on first principles. Not based on your emotions. Make more good decisions than more bad decisions.
Ask Some Questions Regularly
- How would you live your life if you were financially secure? What would change?
- What would happen if you had 5 to 10 years to live?
- What would happen if had a week to live?
Answer these questions regularly. Most important things in life will become irrelevant.
“I began to experience the most powerful advantage of money; the ability to think of things besides money”. – Tara Westover
Urgent and Important
Focus on what is urgent and important. Starting to invest today is both urgent and important. Trying to find the next hot sector is really irrelevant.
Saving money works in your self-interest. It helps you make a fundamental shift in your life to more important things in life. Health, wisdom, happiness and financial security.
Avoid Debt. Keep more Money.
It’s a simple mantra. You end up keeping more money by avoiding debt. I tend to keep my debt – equity ratio to less than 1% at all times.
Try to wait for a few weeks before you buy the thing you really want. Go on a spending fast. Put a price tag to your goals.
What you really want is freedom. You want freedom from your money problems. You want retirement. Not the 65 year old type of retirement. But the “I won’t sacrifice today for tomorrow” type of retirement – Naval