1. Mental equanimity is the key
What do we understand by mental equanimity? It is the ability to think clearly even when markets are volatile and the investor is under tremendous pressure. Normally, this is when most investors tend to falter and commit serious investing blunders. In fact, mental equanimity is all about the balance that you can maintain even when the market appears to go against you. There are actually two aspects to mental equanimity. Stock markets are driven by fear and greed. Normally, investors tend to get greedy at the top of the market and fearful at the bottom of the market. Smart investing is all about doing the exact opposite. For example, if you had maintained your equanimity at the market lows of 2003 and 2009, then you would have ended up with fabulous investments at great prices.
2. Not just equanimity; you also require poise
How exactly is poise different from equanimity? The difference is quite subtle but it still does exist. For example, equanimity is about being fearful or greedy in the markets at the right time. If you get this combination wrong, you could end up with losses. Poise is about the state of mind in which you take decisions. Some of the basic rules are: Avoid making important investment decisions when you are in a state of anger or frustration. Also, avoid investment decisions when you are in a state of anxiety or shock. Above all, avoid taking serious investment decisions in a state of excitement because you are most likely to overreach yourself.
3. Don’t chase returns, chase the proper methodology
If you are more obsessed about the results rather than the process, if you are more worried about the ends than about the means, then you have a mindset problem with respect to investing. Remember, investing is a lot more of getting the methodology right. How you identify stocks, how you screen stocks, what are the non-financial parameters you consider, how do you leverage on the moat and the margin of safety, how do you add value by fine tuning your entry and exit levels; all these are part of your investment process or methodology. Your focus should be on perfecting this methodology and the results will automatically follow.
4. Be self-driven and be a self-learner
The stock market is a great teacher but to really learn the critical lessons from the market, you have to be an avid observer and a self-driven learner. The best way to learn from the market is to listen intently to what the market is trying to tell you. Try to document the learnings from the market on a daily basis and it can become your Bible for trading. The crux of the issue is that your mindset should be that of a self-learner. The market is not a classroom where you will be taught the nuances. It is a huge body of knowledge from which you can liberally draw upon.
5. Be humble to accept losses and your mistakes
If you do not practice humility in your actions, then investing is not for you. The best of investors get their investments wrong. The trick is to be humble enough to admit that you were wrong and take appropriate corrective action. If arrogance leads you to either average the position or outsmart the market, then you will have a real mindset problem when you are investing. Accept that the market has a lot to teach you and accept your mistakes. That is the key to the right investing mindset.
6. An ounce of action is worth a pound of planning
You can create the best of plans on the drawing board but you actually need to action on them. There are some things about the stock markets that you can learn only once you start trading with real money. Simulation can only take you so far! Adopt a mindset that is action oriented rather than indulging too much in finesse. Finally, that is what counts!