Most of us have read the tale of “the rabbit and the turtle” in our schooldays. Let's recall the tale and refresh our childhood.
Once upon a time, there was a rabbit, who was overconfident because of his abilities. The rabbit used to boast about his skills and he used to make fun of a turtle since the latter was very slow. The turtle got really annoyed with the rabbit's behavior and one day, he challenged the rabbit for a race. The rabbit on hearing this, mocked the turtle believing that there is no chance that he can win, and they agreed to race.
The next morning, they reached the starting point and the rabbit pulled up his socks, still mocking at the turtle. They started and the rabbit instantly picked up pace, while the turtle started the race taking baby steps, the rabbit leaped high and left the turtle far behind in no time.
Midway, the rabbit saw a restaurant, and he was feeling hungry too, he looked around and the turtle reached nowhere near him, so he decided to stop by and eat something. After the meal, the turtle was still out of his sight, and he felt lazy after the meal, so he decided to take a nap. The nap turned into a long careless sleep, and he did not realize when did the turtle ran past him.
The rabbit suddenly woke up, alarmed, and started running as fast as he could to catch up in the race. But when he reached the finish line, he saw the turtle waiting for him. His head hung in embarrassment.
Moral of the story: Slow and steady wins the race
Let's try to relate this story to the life of an investor, how we manage our investments and understand its implications on our financial health. Let's see why the rabbit, in spite of being better positioned lost to the turtle.
- The rabbit leaped very high initially, like the investors who have money and are pumped up to make more out of it. They do not think and start putting in their money, in order to reach the finish line earlier. You have a good start doesn't mean you'll experience same trend all throughout your investments in long term. Your strategy should have a balanced approach to meet your long term goals as per your risk profile. There should also be a differentiation between short-term and long-term goals and planning should be done accordingly of where you want to reach and when.
- Overconfidence: There is a thin line between confidence and overconfidence and once the line is crossed, it can cause only harm. There are investors, who are overconfident on their knowledge about the markets and products and often their views are biased between different asset classes. They go very aggressive in their preference of any particular asset class, often debt and equity, and then risk their money. One has to realise that both asset classes are for different time horizons and suitable as per differing risk profiles of the customers. Going overboard on any particular asset class will put your capital to risk, and this includes investments in Bank FDs which carry of risk of loosing 'real value' over time due to inflation.
- The turtle was slow but was steady at the same time; our mutual fund SIP's are based on the same theme. SIP investments are most suitable for small investors who can regularly invest irrespective of worrying about market levels. The turtle investor will be disciplined and will invest his regular SIP amount, no matter what comes his way, he will not get carried away by a restaurant (another hot investment opportunity) or need for a nap (other personal aspirations like desire to travel, or buying a car, etc). He will meet his other aspirations only after providing for his investment commitment. While a rabbit investor gets carried away by the restaurants and the need for nap falling in his way.
- The rabbit should have been vigilant even if he wanted to take a break. He got so overwhelmed with his hunger and nap, that he forgot his ultimate goal, and when the clock struck 12, he tried his level best to meet his goal, but to his dismay, the turtle was already there. Similarly, the investor who keeps his life goals ahead and religiously follows his investment plan, will meet his goals in time, while others who lose track for other things that come their way, end up repenting. At times, there is no way the investor can make up for his losing vigil, that he can't achieve the goal, no matter how hard he tries.
- The rabbit shouldn't have overlooked the power of patience that the turtle had. The rabbit investor invests and expect instant returns, he does not realize that it is not a magic wand, rather it is a seed which is just sown and will need time to turn into a tree and reap ripe fruits. The rabbit panics and sells at lower prices when the market falls and gets excited when the market rises, and buy more at higher prices. The turtle invests and then wait patiently, he too faces highs and lows but with patience, he keeps a control over his emotions and wins the race.
The story throws light on issues that we face when we become the rabbit and how we should adopt the virtues of patience, discipline, confidence, vigilance and balance of the tortoise in order to win the financial race.