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April 22 is Earth Day – and this was the slogan used on a cartoon poster on the first Earth Day in 1970, with the character Pogo saying – “We have met the enemy, and he is us.” While it still holds true in the context of mankind being the earth’s biggest enemy due to multiple reasons, I think the statement is strikingly true even when it comes to investors.
In market crashes, there is this unending search for who is to blame for it, and multiple theories abound on whose actions led to it. Every time the reasons for the crash are different in terms of the context of the economy, from Harshad Mehta to Technology Dot-com boom to Sub-prime crisis, but the culprits blamed are many, and the enemy is still not to be found. Investors lose money, get out of the market thinking that I cannot find the enemy here, I do not understand this game, and I am not playing it – in most cases, not quite realizing that the enemy can often be found within themselves.
The biggest enemy of an investor is the investor himself. And that has got to do with the emotions of fear or greed, and a lack of a plan (or if it exists, a lack of discipline to adhere to it). The reality is that investment is less about which stocks will rise or which funds to buy, and more about what is your plan and whether you are willing to stick to it. If the investor focuses his attention away from the markets and more towards what his plan is, with respect to his goals, he is making every effort to ensure that he stops being his own enemy. A simple plan that is not dependent on market movements charted out to meet his goals, and the discipline to adhere to it through thick and thin are his best friends.
We all play games like cricket or monopoly – and most players or teams will increase their chances of winning if they have a plan and stick to it. Some times one will have to make slight changes when unexpected things happen and your ability to withstand pressure will matter then, but the importance of a plan and sticking to it cannot be undermined and is paramount. For example, for a game of cricket, you may have a plan to go for the slog in the first 15 overs and then consolidate your position for the next 25 with wickets in hand, and then go for the kill in the last 10 overs. You may lose a few wickets more than expected, and have to modify the plan a bit, but if you still manage to hold on to the plan, you are more likely to reach your target. Or in monopoly, the plan is simply to buy sites, houses, exchange them for hotels, and wait for people to land there and keep paying you rent or buying it from you – so that you get rich. You may get unlucky, and someone else might get the prized sites sometimes, but there is a clear plan to take if you want to win.
In the investment markets, the reason most people are their own enemies is because they do not have a clear plan. So the answer is simple – figure out what strategy or strategies work best for you given your goals, make a plan around them, and have the discipline to stick to that plan. Market prediction becomes irrelevant when an investor has a plan prepared. Market movements help him then only to the extent of assessing if any actions are needed in the context of his plan when the movements happen – and in most cases, irrespective of whether they are up or down – they are likely to be more than welcome for the investor. The search for an enemy will then reduce, as he is likely to see none!