It has been three weeks I am in India and had many opportunities to talk with so many retail investors. This was the first time that I had discussions about investments with them and was amaze to hear different concepts and approach they all apply while investing.

They did asked my opinion on the subject, the very first thing I said to them was “it is not easy to make money by investing in equity”.

To become a successful investor in the long haul we have to overcome few major obstacles. Some of these are obvious – the volume of news and information published in newspapers, blogs and talked on business channels. It becomes very hard for the retail investor to follow those without the luxury of being able to study them full time. The modern finance is full of complex theories and easy to confound anyone and seems hard to crack all of it with less than PhD level qualification.

The most daunting challenge as a professional investors we face, however, is less obvious. It is the same obstacle that we think stands in between long term investors and long term success as long as stock market has existed: Ourselves.

There are so many reasoning favouritisms and heuristics that each individual investor bring to their portfolio decisions. This has given a birth to the entire new field of study – behavioural finance. The insight from this study is clear that the real enemy of investor lies within yourself.

The other most dangerous obstacle is our inbuilt biases towards optimism. To illustrate this, if you were to ask a class of MBA students to rate their income –earning prospects after graduation, most would indicate that they expect to earn more than average of their class. Similarly, if a group of drivers asked to rate their skills related to others will tend to assess themselves as being significantly above average. There will be very few (especially in India) respondents who see themselves as average or below.

I am not aware of any such research conducted on investors to rate their investing skills, but I am pretty sure the outcome will be similar to the above examples.

This inherent optimism affects the way we analyse our successes and failures. Investment outcomes are always mixture of luck and skills, and when we review those outcomes it is easy to see successes as a result of our skill, and failure as a product of bad luck. The only way to really gauge your investing skills is to properly account for a large number of decisions over an extended period and measure performance against some objective yardsticks. This is lot of work, and I expect that very few individual investors would go to this effort.

If our assumptions are right then many investors who are subtly and unintentionally sabotaging their long term prosperity by continually making suboptimal investment decision. When compounded over lifetime, this can add up to a large difference in terms of retirement wealth.

So, as an enterprising investor, how can you avoid this trap and improve your prospects for a comfortable retirement? I suggest you do what professional do – take a sheet of paper and properly document your investment process. Identify and describe what it is that will allow you to compete effectively against all of the investors taking the opposite sides of your buy and sell decisions.

Some of the topics that I want you to consider are the following:

What are your objectives? Think about what return you are trying to earn, and how much risk you are willing to bear to achieve it. Think carefully about this second point, and know in advance how you will respond when a bad case scenario arrives, as it probably will.

What is your edge? Clearly articulating your source of advantage and where you will apply it is perhaps the most important part of the exercise. As Buffett put in his 1996 shareholders letter: “you only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”

If you have interest in studying financial statements to find insights others have missed, that’s great. However, if you are relying on media commentators, brokers, friends, taxi drivers for tips, then this topic needs more work.

How will you manage your portfolio? Position sizes should be part of a plan – they shouldn’t be defined by whatever cash you happen to have at that time. Consider how long you will hold positions and how often you need to rebalance your portfolio. Rebalancing once a year is fine.

Once you have done all that, consider tracking your investment performance over time to see how you perform. This takes a bit of work, but doing so will help you to stay realistic on what can be achieved, and perhaps identify aspects of your plan that need improving.

This sounds like lot of work – and it is – but there is lot at stake. In the long run, getting the most from your investments is well worth the effort. A word of caution, however – if you do this properly you may come to the conclusion that the best course of action is to fire yourself.

Your inputs are most welcomed. Will be interesting to know how many of you are thinking of firing yourself.