A myriad of investment evaluations are available today for us investors to study and analyze for our own portfolios. Normally this involves a lot of calculations and numbers which will really help you arrive to a logical and rational decision whether to take on a particular investment or not.
Rate of return, Discounted Cash flow analysis, charts, book values, 5-year performance tables, etc.
Then you also have to account for the economic state of the country you are investing in. Is their GDP growth OK? Is domestic consumption robust? Is the currency stable? Which industries are booming and not susceptible for a market bubble? Is the fiscal and monetary policy fine-tuned?
After all the countless hours doing these analyses, we must not take into account a factor that is easily overlooked by investors: investment behavior.
What will you do upon the thought that you might lose all your money on this investment? Will you cry because you invested money that you are not willing to lose? Or you take it as a lesson and move on? Can you sleep at night confident that your investments will be ok in the long term? Or you keep rolling in your bed getting so affected by the short term volatilities of the market?
This is where your analysis homework matters. First you must be confident enough to overcome the worry/panic behavior we usually see with investors. After this, the questions come in:
1. Am I using the least amount of time and effort to monitor my investments and still generate excellent returns?
2. Am I sleeping like a baby at night, not worrying about my portfolio’s performance?
3. Does my investment makes sense economically?
These 3 very simple guidelines/indicators is what I use to completely gauge if I have indeed invested correctly. One “NO” answer from this, and I pull out my investment right away (either capture short term gains/cut losses).
These guidelines matter to me because once I have invested on something, I don’t want to waste my time monitoring and worrying about it anymore. The more I worry, the more I tend to make terrible investment decisions. There were times during my younger days in the stock market, where I spend the nights thinking about tomorrow’s opening price for my favorite stock. The result? Bad morning due to lack of sleep, and the uncertainty of how your stock will perform on opening bell.
I don’t want to have a sleepless night and a stressful morning all in a span of 12 hours.
I believe that reward-to-effort ratio must be high. Otherwise, if you keep stressing yourself out and keep monitoring your investments just to make money, it is still considered “working for money”, and not “money works for you”. It pretty much defeats the purpose of investing.
Perhaps the most important investment guideline for me is if it makes sense economically. Being trained to be a long-term fundamental investor, I ensure that my investments are aligned with how the country is moving forward and if the demand for a particular product/service/sector is strong. This is what I need for my portfolio to weather the short term volatilities and perform well on the long-run.
Investing is a marathon, not a sprint.
At the end of the day, it’s every investor for himself. His preferences, his attitude, his style, his temperament and his financial goals will steer the direction of what kind of investments will he be in.
“The investor’s chief problem – and even his worst enemy – is likely to be himself.”