Everybody has their own philosophy when it comes to investment. I have always believed in the power of compounding, it could be the influence of kind of investors I follow or someday dream to become like. I have personally believed in all my investments that the longer time I hold them the better returns they are going to give me. Believing in long term investment doesn’t mean that I forget my money invested, I do circulate them and try to average out my buying price and meanwhile compounding shows its magic when time comes.
Market, these days is showing some bumpy rides just as the volatility in equity market has increased. The equity market has experienced some major turmoil just before the week closed by and has shaken the investors badly. Were you also amongst the lot which was shaken thoroughly and sold their holdings or held them firmly as your emotional intelligence asked you to do, because you know compounding is what is going to save you in a longer run?
Well, there is an ancient saying that emotional intelligence is a crucial skill for all human beings to possess. Emotional intelligence is perceived as a way of well-being and great performance, based on self-awareness, connecting with society, handling stressful conditions and making better decisions. However it’s also about understanding what makes you feel good about, rather than what you’re good at.
Let’s go a little back in time and take a lane walk when we were small kids, our schools used to tell us about IQ: the Intelligent Quotient. Schools make you believe that there is just one academic IQ that you need to be good in, else you’re not intelligent. IQ could be a brilliant indicator on how you will go in academics & school but once you leave school that dozes off a lot. For rest of the life your Emotional Intelligence (EQ) is going to play the biggest role, which has few basic elements to master into-
Self-Awareness: People with high EQ have a grip on their sentiments and they don’t let their feelings rule them. They go by the principles that guide the philosophy of the life.
Self-Regulation: When a person learns to control their emotions and impulses, they don’t become angry or jealous as they are thinking thoroughly before acting or making any decision.
Motivation: These people are so self-motivated that they do not need any external driven forces to keep them energetic. Since they are not involved in any such activities which are putting negative feelings in their minds and soul, they’re free to work towards their goals.
Empathy: When one lives with open and honest view, they feel the feelings of others as well. People with high emotional intelligence do not judge people around them, rather understand their feelings.
Social Skills: People with good social skills are good team players, they do not only focus on development of personal self rather take into account the upliftment of their society as well bringing positive changes in society.
The irony is that no teacher would have asked any one of us to develop our EQ while we were in school but yes, we have been all scolded for having a low IQ and better the same. I’ll relate the EQ with one’s investment patterns because having a good Emotional Intelligence affects greatly as to how we are making our investment decision keeping in mind there are going to be lot many turmoil coming up as per changing RBI regulations. It has been said in a Hindi proverb as well, ‘Patience’s Fruit is Sweet’.
Have you heard of the Marshmallow experiment and the Power of Delayed Gratification? This experiment was performed on kids ranging in age between 4-5 years, and the outcome tells existence of one of the most important characteristics responsible for success in life, work and health. The experiment was to bring on each child in a room privately and offer a marshmallow BUT with a deal. The deal was one marshmallow right now or two marshmallow later, i.e. if the child finishes up one marshmallow kept on table the moment researcher was out of the room, he would end up eating that one marshmallow OR if the researcher comes back in room and finds out that one marshmallow was not eaten by the child, the child shall get one more that is two marshmallows.
The footage of the room was observed by the researchers and they were not surprised at all to see few of the kids just jumping off to the marshmallow and gulping it as soon as the researcher was out of the experiment room. Few children were seen to try stopping themselves and getting busy in some activities so that they do not focus on marshmallow, but at some point they gave up to their temptation and finished the marshmallow. Fewest were the kids who did manage to wait the entire time eyeing on to the second marshmallow too. After some years or so these participating kids were tracked down as to how they’re doing in their adolescent life, and the findings were surprising.
The children who were ready to delay fulfilment of eating the marshmallow and waited to receive the second marshmallow ended up having lower levels of material exploitation, lower obesity, better retorts to stress, better social skills as informed by their parents, and in general better marks in a range of other life events as well. It depicts that success usually comes down to picking the discomfort of discipline over the ease of distraction.
What do you think the children who waited till they receive the second marshmallow had this self-control naturally or they developed this important trait in them? Generally no child has this trait naturally, they saw the gratification they were promised for if they waited and they had the ability to wait. The combined effects of the two made them come up with two marshmallows at the end while others who didn’t follow any discipline and made attempt to distract their temptation ended up having just one.
The take-away from the experiment cited above is that if we want to be successful at something, at some point we shall need to have the ability to be disciplined and take action rather being distracted and doing what’s easy. Success in nearly every arena needs you to avoid doing something easier (delaying gratification) in support of doing something harder (doing the work and putting in your reps).
Investment same way requires a fair amount of discipline and commitment from the investors, for not being distracted by the day-to-day news flashes or market turmoil because of sentiments. Investment, when given enough time spurs on itself by the virtue of compounding. To conclude, I’ll say the most powerful vigour in the universe is compound interest. So,
- Start early
- Invest regularly, and keep on increasing your contribution
- Most significantly, have patience!