Getting great equity returns sustainably only looks like magic, it actually isn't
18-Sep-2023 •Dhirendra Kumar
Given the performance of the Indian stock markets over the last few decades, no one should have lost any money. It's true. The markets are up 1.7 times over the last five years, 3.6 times over 10 years, 4.6 times over 15 years, 16 times over 20 years and 22 times over 25 years.
On the face of it, one would think that with such a high-performing market, all that an investor needs to do is just be in the market and stick to some basic rules like avoiding obvious duds and diversifying. That's all that is needed to generate wealth. Even though this is fundamentally true, most investors stumble somewhere or the other. Many, perhaps most, get diverted to speculation and short-term trading under the influence of their brokers or now, by the general short-termist atmosphere on markets-related social media. Others don't pay attention to basic research and diversification. At some point pretty soon, they make big losses and then either withdraw from investing or change course.
I believe one of the fundamental reasons why so many people have trouble investing in the stock markets is that they have severely flawed mental models of what determines a stock price.
The most common model is: 'There are people who know when a stock's price is about to rise. If one of them tells me, then I can make money.' This is the 'tip' model of the stock markets. It isn't so much a mental model as the lack of one. A little broader than the 'tip' model is the 'operator' model. Under the operator model, people believe that there are people ("operators") who manipulate stocks and what one needs is to figure out what the operators are doing and then somehow, manage to ride the stock while the operator is pushing it. This model might be realistic for fringe stocks but it's actually useful only for the operators themselves. The individuals who believe in it end up being the 'greater fools' that the clever operators need.
Fear of the big guys
The psychological factor that underlies both these models is the fear of the big guy. Investors believe that there are others - professional investors of some kind - who possess some magic that the small guy does not have access to. This is partially correct. I mean there is a magic in investing well, but the small guy can also master it and become a magician.
Personally, I was lucky to understand this when I was very young, simply because I stumbled on Peter Lynch's great book 'One Up on Wall Street'. No individual investor should ignore reading Peter Lynch.
A handful of winners
If you put together a portfolio of five to ten high achievers, there's a decent chance one of them will turn out to be a 10-, a 20-, or even a 50-bagger, where you can make 10, 20, or 50 times your investment. With your stake divided among a handful of issues, all it takes is a couple of gains of this magnitude in a lifetime to produce superior returns.
One of the oldest sayings on Wall Street is "Let your winners run, and cut your losers." It's easy to make a mistake and do the opposite, pulling out the flowers and watering the weeds. ... If you're lucky enough to have one golden egg in your portfolio, it may not matter if you have a couple of rotten ones in there with it. Let's say you have a portfolio of six stocks. Two of them are average, two of them are below average, and one is a real loser. But you also have one stellar performer. Your Coca-Cola, your Gillette. A stock that reminds you why you invested in the first place. In other words, you don't have to be right all the time to do well in stocks.
How to do magic
Summing up, this leads us to a few steps: identify likely stocks that will do sustainably well, research them, buy them and track them. The question is, how to do all this without putting in the kind of time and effort that a professional can. I'm sure you know the answer to that.
This is exactly what Value Research Stock Advisor does for you. It gives you not just a list of stocks to buy but their investment thesis. More than that, our researchers and analysts keep re-examining the thesis and keep it updated and fresh, so to speak. Members get not just the 'what', but the 'why.' As Peter Lynch says in everything that he writes, this is a long game. You need all the help that you can get. That's the role of Value Research Stock Advisor. We don't pretend to take all the decisions for you - we are your research assistant team but our goal is to make you the investor.
Let me just recap what you get when you become a member:
To start immediately, head over to Value Research Stock Advisor, read the details and become a member. You can take the one-year membership or get a 33 per cent discount for three years. Either way, it's a great deal.