My small contribution in attempting to smoothen the creases!!
But what does time do that other factors don’t?
In a growing economy, meaning where the GDP is on a rising trend, median incomes are going up and interest rates are showing decreasing trends, it is only to be expected that the average growth rates of industries participating in the GDP will also show strength. Meaning the companies within the sectors showing growth will also be similarly growing. Thus the economy grows because of the entities within it grow too and then soe will be faster growing while others will be laggards. But over time the growth rate of the companies are definitively mirrored by the growth in the company’s share prices and if the trend is strong the prices tend to move ahead of the company’s growth rate. This leads to the most powerful phenomenon, that even Einstein says is the 8th wonder of the world – THE POWER OF COMPOUNDING. For example if a company grows at the rate of 15% over 3 years, its value over the period is NOT 45%. …. But 52%. So the longer we stay invested the bigger is our compounding and higher is our returns percent.
But Why arean’t markets returning the amount so fantastically as we are making out here?
That s because even though we are talking about AVERAGE growth rates over time, this does not mean that every year the growth is equal. Equity being what they are, they tend to move in spurts and bursts and never ever on a equal basis. So some years we might see the markets return negative and some years it will be positive. Some of the years will be close to hell and some will be as close to seventh heaven as one can imagine. BUT, check out your statement. No matter which equity fund I am invested in, I would have made good the losses made on my purchases last year. Very soon, I will make good the losses the year before. And then I will reach a point where 80-85 percent of my investments are always in money. Even now, the best performing investments are the ones which have been bought in at the worst time ever. And the worst ones are the months that we thought were pretty neat. And that’s because of the stock markets nature. The markets are a mirror to the commercial and financial sentiments that run through the economy. As with all sentiments, these tend to ebb and flow. And make the stock prices behave the same. But any amount of study and research has proven that we are, over a period of time likely to return the growth rates through the prices of stocks. So if the prices are to rectify at sometime in the future, buying them along every price point till we reach that correct value is the most logical thing to do. So why bother about current prices. Focus on the future value only.
But today there are so many companies, participating in so many sectors that it’s difficult to choose between companies and shares and timings. So what do I do about solving these? I invest through the mutual fund route. I know the fund values I bought in 4 years back are nearly 100 pc secure. And the ones I bought 6 years are back are almost embarrassing, in providing the super normal returns. I only focus my attention on allocating my resources. I try to cover as big a part of the markets as I possibly can and always buying in contra positions. But that’s another blog topic.