Process, the essential ingredient for investing success

Investing for most people is like sailing in the ocean, there is a constant rhythm of waves, and occasionally, you are hit by a storm, and are tossed around violently, making you feel that the size of your ship is inconsequential to the powers that the oceans unleash. You are gripped with fear of drowning and that the storm never ending. But it does, eventually. That’s the nature of the ocean. The question is what is your condition and that of your ship after the storm?

The market goes up, down and sideways and our emotions follow. That cannot be avoided. The trouble starts when our decisions are driven by our emotions. How do you avoid this?  The answer to this very simple – you can’t if you continue to be a person sailing on a ship. If you are a creature of the surface, you cannot expect not to be governed by the laws of the waves. Two examples of these are trading and momentum investing. Even it works for some people, it requires you to make a huge effort continuously and forever struggle with your emotions.  In general, all short-term investing is governed by this.

Then what do we do?

Become fish, a shark, a whale that swims in the ocean, under the surface and is unaffected by waves. They thrive in the ocean; they know the currents that they can ride to move vast distances with ease. They have streamlined bodies with fins and tails that enable them to swim and navigate. And have fun when they visit the surface of the ocean. How can you mould yourself to be an investor that swims like a fish not affected by the laws that govern the waves and storms in the market?

The answer is to follow an Investing Process that governs swimming in the ocean like a fish.

In the Indian market, the sheer number of possibilities to invest in can be overwhelming. There are approximately 5000+ stocks listed in India and hundreds of different funds available. Eventually, to invest is to make decisions; related to buying, selling, building, and managing a portfolio so that you achieve your financial goals. An Investing Process is when these decisions are taken by following a pre-defined set of rules.

The first challenge faced by investors is to be Process-driven. That is not easy for many people, at least not in the early years of investing. They prefer to take decisions on a case-by-case basis, mainly because they don’t believe a set of rules can exist that can help them invest successfully. However, seasoned investors are more inclined to follow a process, probably because they have seen the folly of other ways of making investing decisions.

The second challenge is selecting a set of rules that enable you to swim like a fish and reach your goals and not be adversely affected by the happening on the surface. Rules that prevent you from making mistakes and if that is not possible in investing, to minimise such mistakes. The mistakes usually are buying a risky stock – a stock of a company that has a poor, unreliable performance track record, is poor governed, has dishonest promoters or promoters least interested in the interest of minority shareholders, etc. And the other mistake is buying because the price is rising, there’s lots of ‘good’ news around the stocks, market players are all saying ‘BUY’. This results in buying at a high price and exposing yourself to the risk of steep correction and/or poor returns.

The second thing a set of rules must do is enable you to ride the current that takes you to success with the least effort. It should not require you to constantly monitor and evaluate your decision every time something changes, relying on quarterly results, etc.  This ocean current in investing is called Compounding. And what you need is an Investing Process that helps you tap into the power of compounding.