Why My Friends Lost or Earned Only Meger Returns from Investments in Both Stocks and Mutual Funds?

Dear Friend!

You have raised a very pertinent question that has the potential of addressing a similar doubt in the minds of many. Thank you.

I really do not know the background facts, still the a few reasons for poor results is quite evident and they can be listed as follows:

1. Investment Timeframe: For what time were had they remained invested? Share markets can remain depressed for a few years at a stretch and for the last few years they have not progressed very much. What do you think is the right timeframe for meaningful long term wealth creation? It is a bare minimum 20 years and ideally 40 to 50 years. Why such a lengthy spell? Only over such long periods, the ‘Miracle of Compounding’ discovered and propounded by Albert Einstein will get an opportunity to work for the investor.
2. What is the Actual definition of Returns: Most of have been conditioned to believe, in the context of investments at least, that return means increase in the market price of the investment. Of course capital appreciation is a vital ingredient ofreturns but it is in addition to regular and recurring returns: dividends, special dividends and bonus shares. Over 40–50 year interval if you aggregate the regular returns with the capital appreciation at the end, we will be pleasantly shocked at where we stand.
3. The quality and purchase price of stocks: Stocks, I am not talking about mutual funds here, need to be purchased of good companies at a ‘Fair Price’. If one buys a stock that has an intrinsic value of Rs.100 is bought at Rs.200, what upside can we expect from the investment, that too over a short period of time?

Friend, ‘Value Investing’ is a time tested and sure path to long term wealth creation. There is no room for doubt or argument about it. Please buy a copy of ‘The Intelligent Investor’ by Benjamin Graham, TODAY, your life will change!

Thank you,

With Best Regards

Anand

You Only Find Out Who is Swimming Naked When The Tide Goes Out

What did Warren Buffett mean when he said, “You only find out who is swimming naked when the tide goes out?”

Clearly, he is talking about two things:  Quality of Stock, and Price Paid for Them.

When the share market is in the midst of a “Bull Run”, the market value of your portfolio will certainly cover-up all mistakes made in selecting the company and the price paid for acquiring the shares; every stock in the portfolio shows a blue tick, and a unrealized gain, prompting the lay investor to falsely believe he is a great investor, bestowed with abundant investment wisdom.

No wonder, the seasoned value investor’s portfolio too, is showing significant growth – may be on par with the benchmark index, like BSE Sensex, or surpassing it or underperforming it – nevertheless it’s value has certainly grown.  However, the “value investor”, trained unceasingly in keeping the emotions under strict control, is Stoic. 

In fact, you can observe a distinct deviation in her behavior, either she is very parsimonious in investing in stocks or has given the market a total miss; instead, preferring bonds or other fixed income securities.  On rare occasions you may observe that the value investor had sold shares of a company or two, at handsome profits of course, which had recently gone through some fundamental changes, which are not to the liking of the investor or which are contrary to value investing principles.

On the other hand, our lay and ignorant investor, who is under the false credence of superior investment acumen, is continuing to pour money into the stock portfolio.  Drunk with “Greed” and “Overconfidence”, he might be investing even borrowed money.

The markets are on a roll, in the meantime, lulling the investor community, the so-called “Experts”, media, regulators and political leaders into a false sense of everything-is-going-good feeling.

At last, the time for reckoning arrives!  Some catastrophic Global Event like Lehman Brothers triggers a market crash.  Portfolios world over start bleeding.  Margin Calls and unilateral squaring up of traders’ positions accentuate both the market fall as well as lay investor pain.  Euphoria, which was prevalent, not so long ago is replaced with gloom. 

The tide is going out fast, and you find out who is swimming naked -  who is safe and who getting washed away in the tide.