Observing joggers in morning made me realize, about surprisingly similar behavioral traits of Investor Vs Traders and Marathoners Vs Sprinters. Successful long-term investors behave like marathon runners. They are well prepared, resilient, disciplined and focused in order to complete the race. However short term investors investor behave more like sprinters which end up giving it all they have got, and are focused on a single outcome which is “First spot”. Sprinters emotion work on binary system of ‘Success’ and ‘Failure’. They are always on an emotional roller coaster ride of euphoria and fear. Similarly a short term investor panics when the market sells off, is euphoric when it soars, checks his portfolio too frequently and often switches tactics mid-course. This tendency to extrapolate recent history into the future—called “Representativeness Bias” in behavioral finance—often leads to poor investment decisions and can be hazardous to one's investment health. As investment sage Ben Graham once said: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” However, Marathoners work on their physical, mental and psychological training; monitoring running speed, mental preparation, food intake in order to produce best results. Same is achieved by a long term investor with right allocation and a well balanced portfolio. Marathon runners are always calm and confident, searching for that “right rhythm”, which helps them run effortlessly .just like long term investors they check their performance periodically and make minor adjustment to get that nice cadence.
On racing day, pressure is high and the results determine what lies after the event. Sprinters checks his position too often just like a short term investor checking is portfolio every minute. However Marathoner is not worried about who is getting ahead and what is his current position, he knows most of those running fast will fall soon and he will meet them anyway. His mission is to finish the race, not necessarily to get to the 'First spot'. There is nothing to panic with plenty of time to make adjustments on the way if required, Just like scheduled portfolio reviews of a long term investor. Without much pressure of other competitors, their strategy is simple, "Finish the race” that is “avoid accidents”.
There is also another strategy to complete the marathon: Walking. Walking is so risk averse that one it without even a clear goal in mind. Investing in Fixed deposits and savings is like walking in the marathon. Firstly walker will not be able to finish the race because it is boring and there are good chances that he will abandon it midway. Even if he finishes it, event is over and all cheering crowd has gone home anyways, there is no celebration for him as he has finished it too late. Same is true with saver with no investment plan. They might feel there are avoiding risks by choosing default investment options. However, those who take such default investment options (Fixed deposits and savings) also take default risk (Inflation) along with it. These behavioral traits govern ones investments and are key to success or failure. Investing by its nature is like a Marathon race, it’s up to you to decide whose behavioral traits you need to adopt.