Learning and unlearning to be a successful investor

I've often heard successful investors say that succeeding at investments is more a matter of temperament than of technique, skill, knowledge, or something to that effect. An old article on the investing website The Motley Fool referred to a book named 'How Children Succeed: Grit, Curiosity, and the Hidden Power of Character', written by researcher Paul Tough. Tough's book shows how character is more important than intelligence in determining whether a child succeeds in life or not.

Qualities like persistence and the willingness to sustain determined effort in the face of adversity were far bigger determinants of success later in life than academic rigour. This flies in the face of our education system, which has focused solely on academic performance. Perhaps selection procedures should take into account a candidate's ability to overcome adversity rather than focus on their knack for taking exams. This sounds hard to do and probably is. However, to succeed in savings and investments over a lifetime, you have to possess these qualities.

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The first is that a set of different qualities is more important than intelligence. These include persistence, self-control, curiosity, conscientiousness, grit, and self-confidence. Economists refer to these as non-cognitive skills, psychologists call them personality traits, and the rest of us sometimes think of them as character.

Investors often chase knowledge and skills. It's like believing that building a spreadsheet that evaluates 20 different financial parameters for 1000 companies will get you better returns than understanding just the basic facts about 50 stocks. Nothing could be further from the truth.

What is more important is the ability (or perhaps I should say tendency) to keep calm, focus on basic principles, and not expect unrealistic outcomes. Of course, all these are just words describing abstract concepts. After all, one person's unrealistic expectations may well look like a reasonable estimate to another.

Suggested read: Facts change, principles don't

Another principle the book arrives at is that good habits and processes can lead to remarkable success. In investing, this is probably the most important. The final measure of investing success is not the rate of return that you get but whether you are able to meet your life's financial goals all the way into retirement. For that to happen, the very first requirement is to save, save enough, and start saving enough early. The arithmetic of compounding is an absolute dictator, and decrees outsized success to those who start saving as soon as they start their careers and maintain a good savings rate.

Moreover, if one gets into the mindset needed to invest in equity-backed assets right from the beginning, and learns to live with the volatility, then the eventual positive impact on one's savings turns out to be completely disproportionate.

Unfortunately, this good habit and process is something that is hard to learn. It is a fact that when young people start earning, most of their savings habits remain centred around saving taxes. And that incentivises an individual to hurriedly put a certain sum of money in something like PPF around March 28th every year.

In recent years, intensively marketed and poorly understood insurance products have also been added to the menu. And as for building the habit of investing in equity-backed assets, we have something like the RGESS, whereby those who have never invested before can invest Rs 50,000 a year for three consecutive years if their income is less than Rs 12 lakh a year. And they must only invest in stocks that are part of the BSE and NSE 100 indices, certain PSUs and some other categories. It sounds comically complicated, almost like a spoof of a bureaucratic micromanagement of investors, which is exactly what it is.

If savings and productive investment behaviour are to be learned, then the carrot and stick of taxes and tax exemption is the best way to encourage it. For that to work, these provisions will have to be redesigned as tools specifically meant to do that.

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