Three Ways of Investing
The author has explained three different methods of investing wherein one is intellectually difficult, second is physically difficult and third is emotionally difficult.
1. The intellectually difficult path
This is the path followed by most popular investors such as Warren Buffet, Peter Lynch, Philip Fisher, etc. These are the investors who take long-term bets and have a vision far beyond the general public. Most of us want to be this, but cannot, the reason being, the intelligence possessed by these individuals to predict cash flows comes from years of hard work and hence is seldom replicable.
2. The physically difficult path
Life is simple, we make it complicated. This method of investing is generally followed by most retail investors. We have CNBC or other business channels running throughout the day, collecting information from wherever we can and what not. This does consume a lot of out time and energy as we give long hours of sittings in front of the price screen. The author believes that by this method, investors just try to showcase they are busy, but in reality, they are not doing anything worthwhile. He advises us to keep our minds fresh, as opportunities come once in a while, and we should be able to take a fresh approach.
3. The economically difficult path
This is the second most desirable path after the intellectually difficult path. The intellectually difficult path concentrates on cash flows; however, on the emotionally difficult path, it’s the patience on a test. Commit yourself to a financial goal and stick to it irrespective of the noise surrounding you. Whether your friend, neighbor or broker tells you to sell your portfolio, don’t listen to them and stick to the financial plan. This would cut your transaction cost, and ultimately over the long term, you are destined to benefit from compounding.
The next four chapters deal with behavioral finance and we will learn how to control our emotions in the market.