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Why you should not invest based on hype

We highlight why investing based on short-term noise can be disastrous

Why you should not invest based on hype

dhanak हिंदी में भी पढ़ें read-in-hindi

The markets correct themselves over the long-term. In the short-term, it is anyone's guess. This fundamental rule of long-term wealth creation has been reiterated by many investing greats.

But data speaks louder than any words. Hence, we performed a simple exercise to highlight why you should never invest based on short-term hype.

The good, the average and the bad
We categorised the constituents of the BSE 200 index based on how they grew their shareholders' wealth, i.e., based on their ROE, in the last 10 years.

We excluded 48 companies that didn't have 10 years of financial or trading data.

Here are the different categories:

  • Good companies - companies with ROE of 15 per cent or more in at least eight out of the last 10 years.
  • Average companies - companies with an ROE of 15 per cent or more in at least five and at most seven out of the last 10 years.
  • Poor companies - companies with ROE of 15 per cent or more in less than five years out of the last 10 years.

Next, we calculated the 1Y, 3Y, 5Y and 10Y rolling returns of each of these categories from May 2013 to May 2023.

Here's what we found.

While the Poor companies gave better one-year returns, they witnessed a drastic decline over the years.

On the other hand, good companies rewarded their shareholders handsomely in the long run.

Conclusion
While the above outcome was expected, it highlights how a good company will eventually reward its shareholders despite temporary bouts of underperformance.

It is easy to feel threatened when the headwinds are strong. But if a company is fundamentally good, it can ride out the most turbulent of storms and create wealth. In contrast, a poor company can make a lot of noise in the short-term, but it will fizzle out sooner or later.


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