Assume that you are sailing a boat equipped with sails and fitted with oars.
River ~ Market
Sails ~ Portfolio of stocks
Oars ~ Emotions
Sails: A piece of material (cloth) extended on a mast to catch the wind and propel a boat
Oar: A pole with a flat blade (normally wooden), used to row or steer a boat through the water. In Hindi it is pronounced as ‘Chappoo’, in Gujarati as "Pavado"
If you simply sit on the boat with sails closed (Portfolio is a replica of index stocks), and no movement of the oars (no effect of greed and fear), your boat will move in the direction of the river and will dance to the tunes of the waves. Your boat will move forward and sometimes backward and at times sideways also.
You open the Sails, while Oars still not working.
Your boat will face two forces; one of the rivers and the second of the sails. If sails (read portfolio stocks) are adjusted properly then boat will move faster than the speed of river. Otherwise, it will resist even the direction of river. So open the Sails only if you know how to adjust them to derive maximum benefit.
Sails are open and also you are using oars.
Now there are three forces acting on a boat, first is that of river (i.e. market), second is that of oars (Portfolio structure) and third element is oars which can assist you further in speeding the boat. These three combinations if the act in synchronism can do wonders for your returns positively as well as negatively. Be very careful. Only enterprising and experienced investors should dare to use all three tools.
If you don’t know how to adjust the sails then better stick to index constituents.
If you are unable to control emotions then better keep your oars away.
I know an investor, who keeps the sails permanently closed (holds index stocks only). He is an avid user of oars (emotions). He buys only when there is blood on the streets and never sells. He is earning an average of 20% CAGR returns from the last 30 years.
Well investors, now your device your own strategy depending on your expertise in adjusting the sails or tactfully moving oars or both.
By A K Asnani
Author - Way To Billionaire
(Above techniques worked very well for me with a moderate risk-return profile. Same may not hold good for all kind of investors)
(This article was also published in Smart Investment.)