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Survival of the fittest

Volatility and uncertainty create investors who are going to make lots of money in the years to come - but not everyone qualifies

Survival of the fittest

For many of us, our personalities must be shaped by our childhood and growing-up experiences. I have no rigorous knowledge of such issues but experts say that and it does make sense. What's interesting is that while talking to many investors, I have slowly come to realise that something similar happens in our investing lives. When we just start investing, the first few years shape our thinking and attitude for the rest of our investing lives. We see those as normal and everything that deviates from that as simply something that will revert to mean later.

Does anything change this ever? When I put it like that, a lot of you would be tempted to say that no, people never change. Most of us fall into certain patterns of thinking during our formative years and never really change. I don't believe that. In fact, that's a somewhat depressing idea because it's just a different way of saying that people don't learn and that if they are doing something wrong, they'll just go on doing that all their lives.

This is just not true. Some people may not learn, but most people do. I don't mean this as a general rule of life - that's not my brief here - but as a rule of investing. All successful investors start out in their investing life believing some things are actually not true. Some of those things are true in a particular phase of the equity markets. You could start investing at a time when it's easy to make money on many stocks and on almost any equity funds. That begins to feel normal.

Obviously, something like this has happened to many of us over the last three decades. There have been many stretches, some of them lasting years when the pickings have been easy. Somehow, despite knowing that the good times cannot really last, you sort of believe that old myth that 'this time, it's different.' Except that it isn't - sooner or later, 1995 or 2001 or 2008 happens. The jury is still out on 2020-21 so I won't mention that. When this happens, to match the external phase change, you need a mental phase change. The change that actually happens could be positive, could be negative. You could just give up and run away. A 5 or 10 per cent decline in the value of your investments happens frequently enough for investors to get used to it as part of the normal sequence of events. Moreover, if you have been investing for any length of time, what you are likely losing is one part of your gains. It's not that big a deal.

Then something severe happens and half or more of your investments vanish. When that happens, many investors abandon equity-based investing and run away from investing. I've seen it time and again over these decades. However, a handful of people make the mental phase change. It doesn't take too much time at the bottom to figure out that market declines have hidden benefits if you understand what's happening. It's simple and easy to take advantage of severe declines to build the foundation for future gains.

Then, when the next big crisis hits, these are the investors who are hunting for bargains that will make big gains in the future. It gets easier - and more profitable - every time. Essentially, market declines are a phase when the survival of the fittest happens. Those who can evolve mentally get fitter and fitter to create wealth from their investments in the years to come. Those who can't get past that first shock fall by the wayside.