For those things that you cannot predict, you must prepare in advance. Earthquake is one such phenomenon. When it occurs, it occurs. It doesn’t give any advance notice. But we know that it occurs. Sometimes mild, and sometimes severe. The least that governments & citizens need is to prepare in advance so that the damage caused can be minimized.
Likewise, stock markets, real estate, gold, etc are always vulnerable for sudden demise. They may give indication but not the time when they will shock you. But we know that it happens. This therefore necessitates the need for “well-structured plan” of investment across asset classes. This is a plan that minimizes the damage and maximizes gains. Ironically, 99% of investors make investments without such a plan. Their investment decisions largely are based on two factors:
- Kya chal raha hai ? (where are others investing and getting returns)
- Kya lagta hai ? (what is the outlook for Sensex, Gold, Real estate etc..)
On the contrary, the remaining 1% work with below factors:
- Where are the investors over reacting with Greed or Fear
- Where are the fundamentals improving or deteriorating, so that they are first to enter or exit.
For 99% of the investors, the advice comes from media, peer group and sales people. For the remaining 1%, they prefer to do their homework, seek advice from the experienced advisors, and work with them as team. They know that no one can know enough. Therefore, it always better to take decisions based on personal views and counter views, to avoid biases.
The 1% investors prepare in advance by allocating assets in a manner that minimizes the damage and maximizes the gains due to cyclical changes. They follow their investment plan diligently even if they under perform the broader 99% for a year, two or more. But they don’t compromise on the rules of the game. They are willing to let go of 10%-15% upside to protect 40% to 50% downside. They are not swayed by glamorous product sales pitches where the past performance are good enough to lure the ordinary investor in the fray.
The 1% investor is essentially a Risk Management guy. Investor and his/her advisor invest time & energy in forecasting risk rather than return. Once they get a handle on expected risk and loss in case of risk, they extrapolate risk adjusted return. If the reward is more than risk, they will take the plunge.
Everyone claims to be an investor. But if you look at the behavior of masses, each one is generally a speculator who has come to market to make a quick buck with a stroke of luck. Without a plan & preparation, sadly all their investments are also nothing but speculation.
Wealth creation is not an easy affair. Many think that they can earn from the markets in as easy a manner as pulling a bucket of water from the well with endless reservoir. What they don’t see is that it is actually a war out there between the 1% vs 99%. The 1% always wins this war because they have a game plan, whereas 99% are generally busy predicting the bottom or recovery of markets failing to time it again and again.