What is the best way to compound wealth?
Simple and Natural
No one is crazy.
This is the take-home point from the first chapter of Morgan Housel’s bestselling book, “The Psychology of Money”.
When it comes to money, everyone’s actions are truly congruent with their belief of what’s best for them. For equity investing, this is apparent from the dichotomy in the Long-term (LT) buy-and-hold system vs the short-term (ST) trading. LT dugout believes that their method is the ONLY way for building huge wealth while the ST dugout believes that theirs is the system with a true edge and a recipe for all-weather wealth building.
What’s the truth?
They are both true, but there is more to it.
“There are different ways to make money but only one way that suits you.” ~ Sakatas Homma
In equities, depending on the timeframe of buy and sell, we can divide the market participants into the following (buy-sell duration):
Day trader (<1 day)
Swing trader (1-30 days)
Positional trader (1-6 months)
Longterm investor (>1 year)
In the long run, all the above styles and set-ups will make your wealth compound given it has 2 things built in place:
Time
Risk management
But you will be comfortable following only one style. You will find that system very simple and the process would come naturally and effortlessly to you. You might even enjoy the process. The hurdle is the path to discovery. This might sound like a job, but it is not very hard. Start with the following questions without being biased:
What is your personality?
Are you a Virender Sehwag or a Rahul Dravid? Do you like to play the same way in all the conditions or are you comfortable playing the situation?
would you rather get more wickets or bowl a couple of maiden overs and keep it tight? Other important questions are:
What is your ideal timeframe for investment?
Are you okay with being invested for a year? or does leaving an open position for more than a month make you twitch?
What is your risk tolerance?
At what % drawdown would you start to panic? 5%, 20%, or 50%?
What is your circle of competence?
Do you understand a particular topic or industry better than others?
You will get your answer from these 4 questions. And mind you, your style can evolve and change as you grow old and your circle of competence as well as personality change.
Where to start as a beginner?
As a DIY beginner (if you are reading this I am assuming, just like me, you also want to do this yourself), something like an index fund would be a great place to start. It’s safe and will generate a return equal to the broader market.
Gradually, you will either like studying a business fundamentally or enjoy how the price reacts to demand and supply in different timeframes.
In no time, your process will become one with your personality and other personal sensibilities.
I am a technical analyst and a chartist now, although I started out as a fundamental LT investor and turned into a swing/positional player by taking the route of being a day trader.
I love it here, but I am striving every day to refine the process further.
If you wanna join me in my journey, I do post my educational tweets and videos in bucket loads on Twitter and Youtube.
That is all for today.
See you soon and keep it real.