Human sentiment and market volatility
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In the previous article I wrote about the meaning of investing in yourself; its importance and advantages thereof. The underlying theme of investing in yourself is being able to trust your own conviction as explained in part 1. Being able to do this entails learning and understanding many things among which a few important suggestions are risk, volatility, markets, market situation and human behaviour. Let's explore.
How to understand the concept of risk?
Often people do not correctly understand what they are talking about when they use the word risk. For a trader risk is a potential loss and hence something called 'risk' exists for a gambler or trader or speculator. However, if you were an investor the word to consider is 'volatility' and not risk. As such any human endeavour carries a certain element of risk or danger. However, specifically talking when an investment is done with proper knowledge then there is only volatility and not risk. These words are not interchangeable. When people talk about investing in stock market they are referring to volatility which is inherent to such great wealth creating investments. So how does one have a transition of mindset from risk to volatility? One needs to appreciate that we are more worried if our capital fluctuates but we would not be so perturbed if profits fluctuated. Thus we must first allow for profits to get created which naturally require time, patience and skills. Thereafter, if profits fluctuated it would be alright and psychologically we would be at much more ease. At the end you can still take home a minimum of 14 per cent to 20 per cent average returns and much more each year totally tax-free. See how the word risk loses the undue importance given to it?
Any market, nationally or globally, has certain similar characteristics. There are booms and busts at regular intervals. The word 'market' itself means two views. Someone wants to buy and someone wants to sell. That is quite an irony, is it not? If something was good in someone's view why would the seller sell it? Markets have their cycles and these cycles repeat from time to time. The length of such cycles differs from one category of asset to another. So once you know which category has created how much wealth, you can follow through and history will play out the way it has to taking care of your money as well.