Your Money and Your Emotions: Keep it under check

"The Intelligent Investor" by Benjamin Graham is a wonderful book on value investing I came across in the course of the literature survey for my doctoral research. In this text, Ben Graham cites several examples using a metaphor Mr. Market. He is an obliging fellow who turns up everyday at the share holder's door offering to buy or sell his shares at a difference price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or ignore him completely. Mr. market doesn't mind this, and will be back the following day to quote another price.

The point to mention this anecdote is to emphasize the observation that there is a large number of rules seemingly available in the market, offered by many like Mr Market. If you follow their rules, you are definitely loose, since you will end up as much a slave to Mr. Market as the professionals are.

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A wise piece of advise here is, instead, to recognize the controllable and control them i.e. try to follow your own rules. This is what Ben refers to as intelligent investing. You can't control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims. But, you as investors (and particularly as investing human beings) can control the follwoing:

• your brokerage costs, by trading rarely, patiently, and cheaply; excessive trading involves huge costs in terms of brokerage, commisiion, etc.
• your ownership costs, by refusing to buy mutual funds with excessive annual expenses; exchange traded funds (ETFs) are relatively very much cheaper compared to open ended equity funds - go for them;
• your expectations, by using realism, not fantasy, to forecast your returns; don't consider yourself superior to others in terms of investing skills, knowledge, and abilities that you thing can outperform others;
• your risk, by deciding how much of your total assets to put at hazard in the stock market (following an intelligent asset allocation strategy), by diversifying, and by re-balancing your portfolio(s); and
• most of all, your own BEHAVIOUR.

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Investors in general nowadays watch, listen to and live with financial TV and magazines such as CNN IBN, NDTV Profit, ET Now, CNBC etc., and also read number of market columnists, they would often think that investing is some kind of sport, or a war, or a struggle for survival in a hostile wilderness. But investing isn't about beating others at their game; rather it's about controlling yourself at your own game. The challenge for the investor to become intelligent in the real stock market settings is not to find the stocks that will go up the most and down the least, but rather to prevent yourself from being your worst enemy - from buying high just because Mr. Market suggests you to "Buy!" and from selling low just because Mr. Market says "Sell!" So, keep your money and behaviour under check all the times you're into investing decision process.

Happy Investing!

PS: If this article interests you to know (li'l) more about keeping your expectations realistic while investing, you may also like to go through a great article "Keep it real: Are you basing your financial future on realistic expectations?" by Walter Updegrave, appeared in Money, February 2002. Click here to read the article.