Investing comes down to two things: dollars and mentality. To succeed long-term, an investor must understand this simple principle – and overcome these two primary obstacles.
The “dollars” part is easy to understand. To put it bluntly (and simply), more is better. While this is painfully obvious, the key point to understand is that the more you have, the easier it is to make it grow. Sure it’s entirely possible to grow a small amount of money and become rich, but this can push you past your risk tolerance. Understanding the “dollars” means you can focus on your mindset.
If you decide to start with a small amount of money and want to become rich fast, you’ll need to take excess risk which in turn increases the likelihood of reacting emotionally is much higher. Further, reacting emotionally when it comes to money is always a huge mistake even if it just happens that things panned out okay “this time”. Making ‘big’ money generates a euphoric mindset that the brain catalogs and remembers. Conversely, suppose you lost a ton of capital, the mind will remember the pain that was caused.
The dilemma with the mindset of investing is that there are so many ways to go wrong. If you have been an investor for a long time, there is a good possibility that somewhere along the way, an investment you didn’t expect much from ended up turning into a winner, and you probably thought “Boy that was easy!”. And that’s where the risk is – the danger of seeking that feeling over and over again.
At the far end of the risk-threat scale lies the unexpected large loss. From my experience, most of the time this involves a self-inflicted wound; breaking one’s own rules or guidelines to protect capital (i.e. “I’ll just wait a little bit longer…it will turn around.”). Even if you get out before losing all your capital, the pain from the investment will most likely last for years and forcefully trigger a flight to safety too early time and again. This creates a self-reinforcing loop of failure.
There are ways around all of this that I will talk about in future posts. It is also important to keep in mind that no technique is ever completely foolproof. The first step for an investor is to create an investment plan. Oddly enough, a well-thought-out investment plan is something that virtually every investor would agree they should have but rarely do any put one on paper.
This is ironic, surprising and sad – an investment plan can be the difference between great financial prosperity and destitution.
