Last year, I introduced our first 'Guru' special of Wealth Insight with Kabir's couplet "Guru Govind dou khade, kaake laagoon paay. Balihaari Guru aapne, Govind diyo batai." While the mystic sang in the context of a guru that leads one to the divine, it actually applies to all kind of teachers.
The whole idea of following an investing guru is that one can learn a lot more by observing and analysing the real actions of a real person than by reading abstract knowledge. This is also a much greater learning opportunity about investing because the devil is always in the detail. At a superficial level, it's easy to make a list of stocks that will be good investments. Anyone who has pursued business-studies education for a few years feels that they are well-qualified to judge stocks; and with a little bit of beginners' luck, they may even be able to justify their confidence.
However, what we get from a genuine guru is a lifetime of experience and the context in which that experience was gained. A guru has applied the rules, failed and succeeded, experienced second-order effects, thought about them, modified the rules, applied them again, and done it all many times. Through this cauldron of experiencing success as well as failure has emerged a body of knowledge that has universal applicability.
When you do something for a long time, not only does it become second nature, but it has secondary effects on many parts of your personality and behaviour.
Last month, I read a wonderful book named The Power of Habit by Charles Duhigg. The book details - through anecdote as well as science - how our routine behaviour is driven mostly by habit or the absence of it. It also delves deep into how habits get created and changed, and how this can be achieved consciously. While reading the book, it became clear to me that savings and investments fit right into the framework that Duhigg has described.
Take the simple act of choosing a stock to invest. We can do it haphazardly, looking at different aspects of different companies and making a choice based on what excites us. For a particular stock, it could be the technology it has; for some other, it could just be the track record of the management; and in some other, it could just be the momentum that the stock price seems to be carrying.
How does habit help here? Habit is a framework of actions that you take every time when you are in a given situation. It becomes so ingrained in your behaviour that your brain treats departures from habit as a kind of discomfort so that you do the same thing every time. Once you get into the habit of investing in a certain way, of taking care to check everything that you should, then you'll just feel uncomfortable and actually unable to break the rules. Moreover, a positive habit can actually replace bad habits. Not just that, the feeling of victory that you get when following a positive habit can be the trigger for those in other areas.
The interesting thing that Duhigg describes is that habits are contagious. We invest a bit here and there but it doesn't become a habit. There are no second-order positive effects. Psychologically, it's a completely different phenomena. The power of habits never kicks in and the larger benefit is lost.