Common Sense Investing 1 comments

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I have often felt that the process of investing in the stock market is no different from many other everyday activities. If we apply to investing the same kind of thought process that we unconsciously perform in going about these daily activities, it would reduce risks significantly.

Take for example, if you wanted to get to a certain location, and are thinking about whether to catch Bus A, which you know goes to your destination but is rather slow; or Bus B, which you have never taken before but were told by a stranger that it might go there and is much faster. Most likely you would do one of two things: firstly, take the safer Bus A and enjoy the journey; secondly, check with a more trustworthy party, such as the bus driver, on whether Bus B actually goes to your destination. Extend the metaphor to investing attitudes and pre-investing rituals.

Now imagine you are crossing the road. Depending on your assessment of your jaywalking skills, you could wait until the coast is clear before venturing across, or you might adroitly dodge onrushing cars as you run across. What if you were with your wife and a stroller containing your baby in tow? Obviously the first option must be the choice. Some would even choose to use a safer mode such as the underpass. Varying your risk appetite according to your own unique situation is also applicable to sensible investing.

There are so many metaphors that we can carry from real-life into our attitudes towards personal finance that I always make it a point to do so. It gives a sense of grounding in my decisions, and assures me that my final decision is not divorced from reality.