How to develop a mindset of an Investor? – Traders vs InvestorsLast Updated Date: Nov 17, 2022
Your mindset as an investor would depend on what your financial goal in life is. An investor lends his resources or invests it in ventures he believes would yield good returns to him.
The main aim of any investor is to maximize profits while minimizing returns.
As Bobbert Kiyosaki said, being rich means having money work for you, not the other way around. This is what can be achieved by effective investing.
Traders vs Investors
A successful investor separates himself from the crowd of speculators and traders by avoiding any short term market noises.
He believes in his fundamental analysis of the company. The investors do not generally square off their positions based on market movements in the short term.
For example, if RBI announces a rate cut, the traders will look at such a policy’s impact in the short term. They will buy/ sell their positions, keeping in mind short term goals.
However, the investors would not worry about any such news. He understands that the RBI fluctuations in interest rates are just to control inflation or push the demand in the market.
There is absolutely no certainty that these movements will impact the shares’ market value in the long run. This is what we call the mindset of an investor!
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Developing an Investors Mindset
We will go through a step by step process on how an investor thinks before starting any kind of Investment.
Here are few questions an investor must ask himself & read about its answers to develop the mindset of an investor.
Is Investing a Good Idea?
In simple words, the answer is Yes! Investing is an excellent way to achieve financial independence in life. This is because of the compounding effect, which is explained below.
However, in order to be a successful investor, one needs to pick the right stocks. The right companies are the ones that show an upward trend in revenues, have a reasonable P/E ratio, a less P/B ratio, etc.
The companies which have highly fluctuating sales volume should be avoided for investment. A safe investor never risks his capital in such stocks.
This is the 1st question an investor must ask before investing.
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How does Investing work?
To develop a mindset of an Investor, this is the 2nd question you must ask & also go through the entire explanation to understand how investing works.
The main reason why investors decide to stay in the market while closing their ears to the noises is because of the compounding effect.
The compounding effect means that the amount you invest gets reinvested the following year.
At the end of the year, you can withdraw the interest and reinvest the principal, or let the principal also stay invested.
This can be explained using the following example:
Suppose Mr. A invests INR 100 in a stock of company X. The stock is expected to grow at 20% per annum. So, by the end of the first year, your INR 100 will grow to INR 120.
So, now he can either:
- Withdraw INR 20
- Reinvest the whole INR 120
Let us say that Mr. A is a good investor, and he believes that Company X is on an uptrend. So he reinvests his entire INR 120.
By the end of next year, his capital grows to INR 144. He again reinvests it, and by the third year, the amount becomes INR 172.8.
So, here we see that he earned a 78% return on his investment within three years. This would not have been the case had he withdrawn his INR 20 after the first year.
This is the compounding effect and the power of the right investment. With a clear mindset, the investor can earn such high returns on his capital.
The benefits of having an Investor Mindset
In order to truly appreciate the investor mindset, you need to understand the different kinds of perspectives people have when it comes to saving and investing:
This is the most common kind of people you will find in India. These include the ones who will earn handsome salaries.
They will pay off their bills, save money in bank accounts, and then party with the rest. This mindset is not a particularly profitable mindset, which limits a better future.
It is essential to understand that you cannot keep going for a job your entire life. People with this mindset live their life without worrying about tomorrow.
This tampers the possibility of a secured future, a tomorrow similar with present lifestyle, and hence you need to think a little about it!
It is easy to spot many savers as well. These include the ones who have a well-prepared plan in hand.
They will keep allocating some amounts from their monthly salary for their future expenses. They will keep on accumulating this amount.
The savers live a better life than the ones with a preset mindset. This is because they have something to use when they retire.
However, they need to consider that they cannot predict the future with so much certainty. They don’t know what will happen and hence should not rely on their job so much.
People with this mindset are the ones that can get rich and retire early. They do not just save part of their incomes.
Instead, they invest money in useful places. In other words, they make money work for them. The simple rule the investors follow is that: The longer you play, the more you have.
Investors do not have to worry about the future, as they have their resources invested in companies working well.
Their money is working while they can enjoy their lives the way they want. The companies pay them regular dividends.
Investors, therefore, invest in their future. The sky is the limit for growth! This mindset is all about self-empowerment. It takes belief in oneself to start taking control of the future.
Start tiny, grow eventually! Always remember that you learn from mistakes only. You can take only one step at a time towards a smarter and wealthier future.
Investing is an art that you know with experience and time.
Should you give your money to someone else?
Another very important question an investor must ask that whether he/she should trust others i.e. a broker or an advisor with his/her hard earned money.
This might seem like an easy way out. But in the long run, you should know that it is your money. And, everyone has their own financial goals.
The expert might be able to get you a good return according to his perception. But, this might not help you every time. You need to learn investing to be able to grow your money, your way!
A simple example of this is mutual funds. When an investor gives his money to a mutual fund manager, the manager will think about his business’s returns before thinking about the individual investor.
The goal of the mutual fund manager is to improve the returns for his business. So, long story short, it is always advisable to learn to invest your money yourself!
Attributes to look for while investing:
For anyone looking to invest, they need to look at both the qualitative and quantitative aspects of a company.
Qualitative aspects include:
- Business ethics
- Corporate governance policies
- Salaries paid to promoters
- Related transactions
- Political affiliation
Quantitative aspects include:
- P/E ratio
- Operating efficiency
- Dividend payouts
- Growth expectations
All these factors impact the company’s stock prices in different manners. It is essential to study both the fundamentals and the technical properly before investing in the company.
Investors Mindset: Conclusion
Thus, an investor mindset includes thinking about the future and planning in advance for it.
It involves using your resources in a well-defined manner while ensuring that they grow and give higher returns in the future.
In order to be a good investor, you need to learn about the fundamentals analysis and various aspects related to it.
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