Saturday, 8 March 2014

How realism triumphs over anxiety and worry. Magic formulas are not a good way of making plans. Uncertainty is part of the game for better or worse

Exaggerated fear is, more often than not, a mistake. If you act prudently, every period can be good to make financial commitments. When bad news and pessimism reign, those are times of great opportunity to purchase shares of solid companies at low prices.

How realism triumphs over anxiety and worry

Stories of financial collapse reported by the media in the past succeed in terrifying many people out of the stock market. At the time of writing this, you can hardly turn on the radio or open a newspaper without learning about one more company on the brink of bankruptcy.

However, in investing, like in everything else, realism triumphs over anxiety and worry. Gloomy reporters seldom look objectively at facts. On many occasions, share-holders would be better off if they keep a cool head and avoid liquidating their stocks at fire-sale prices.

The first step to develop self-confidence as an investor is to realize that nobody possesses the ability to predict exactly when shares are going up or down. There is no magic formula for successful investing. The best you can do is to strive to keep well informed and make rational decisions.

After a period of inflation or deflation has begun, some people will claim that they had predicted what was going to happen, but these are often the same persons who had previously made many wrong predictions. A broken clock gives you the right time twice per day, but cannot provide you accurate time information.

Magic formulas are not a good way of making plans

Reason and realism constitute a superior approach to making investment decisions. If you want to develop self-confidence as an investor, you have to remind yourself every day to have patience. Forget about short-term volatility and look at the big picture. Ask yourself where the world economy is headed for in the next five years.

Move your focus beyond the next quarter and see what the whole year will look like. Look for companies with a strong international presence. Even in periods of generalized gloom and doom, many countries continue to grow at good rates.

Rational investors tend to prefer enterprises that operate in stable markets, in particular if their dividend is maintained or increased. At the same time, risks can be minimized by investing in corporations, such as pharmaceutical multi-nationals, that have world-wide distribution for their products. These enterprises often purchase rights to new drugs from small laboratories and universities in order to distribute those medicines internationally.

How can you increase your confidence in making the right financial decisions? You do not need to know everything in order to become a good investor. Aim at identifying well-managed companies whose shares are priced attractively. If their products meet fundamental human needs efficiently, chances are that those businesses will do well.

Uncertainty is part of the game for better or worse

Problems that you know nothing about might come up next week and make your shares go down. Uncertainty is part of the game for better or worse. A claim of infallibility is something that you should leave to those who believe in magic formulas. Accept that you will make mistakes and do not fall into endless self-recrimination.

Make your investment decisions on the basis of reasonable expectations and stop worrying about the future. If you diversify your portfolio and buy shares of companies that operate in countries with good prospects of economic growth, you should be able to profit from the increasing prosperity around the world.

For more information about rational living and personal development, I refer you to my book The 10 Principles of Rational Living


[Image by Dirigentens under Creative Commons Attribution License. See the license terms under]

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