As we approach the end of 2018, it is a good time to take stock as we prepare for the opportunity the upcoming year 2019 represents. One of the key decisions I made in 2018 was to step out of my comfort zone and take more risks.
Avoiding risks comes very naturally if you are not from an entrepreneurial family. Both my parents were teachers so what we knew best was going to school, acquiring degrees and working for people willing to take risks on our behalf. That works pretty well when you graduate with good grades and get a good job.
The challenge is that your financial progress is outside your control. Even when you invest in the money market, your returns are still limited. You can make enough money to achieve financial independence, but if you want more, it is time to take on risk. Here comes the problem. With risks comes the potential of loss or failure, and if you have been cocooned in academia or corporate world, you hate it with a passion. You rather not win than lose.
In school, we look at failure as a bad thing. You rather not attempt than attempt and fail. The answers are straightforward and your job is to get the right answer. You are not promoted to the next class for thinking outside the box or taking risks. You are promoted for doing what you are told – giving the examiner the answers he is looking for. While that may earn you high grades (some students even cram their way to the top of the class), in the marketplace, you cannot avoid making mistakes or suffering loss. It is part of the success equation.
To become a better investor, you need to master the three elements involved in investing as in most areas of life.
- Mechanics or Tactics
This is the know-how to execute a task and various strategies or approaches to accomplishing the task. This is the ‘How to’. It is the least part of the equation (between 10 – 20%) but this is where most of us focus on. This aspect is quite exciting because this is where you get to take action. ‘How to’ books often sell more than any other type of books on any subject, because people want to be told what to do. It spares you the hassles of having to think. A lot of people take action before they fully understand what they are doing.
- Risk Management
This has to do with learning how to protect yourself from loss. A good investor does not take a naked position. She has an entry and exit strategy. She does not go in with the mindset that winning is the only possible outcome. Things you did not anticipate can occur. You cannot anticipate everything as you are not all-knowing. That is why you take insurance. If you are going into a very risky venture, you need to be humble enough to know that you can lose your money, and protect yourself from loss. Five straight wins do not guaranty the sixth win. You don’t go in with money you can’t afford to lose. You don’t wipe out your reserves or use your rent money or children’s school fees to try to double the money and replace it. The fact that you cannot afford to lose the money is pressure by itself. If you can afford to lose it, you are more relaxed and think more clearly
- Psychology (emotional intelligence)
The moment money is involved, fear and greed rear their ugly heads. They can take over your thinking if you are not in control. Greed will push you to enter when you ought to wait or wait when you ought to exit. Fear will make you wait when you ought to enter or exit when you are supposed to stay on.
You need a steady head and a steady hand if you are to succeed as an investor. This will not happen overnight. You learn on the job. You cannot develop it by reading alone. You have to pay your own price. More often than not, this involves failing.