Rise above the average.
We have heard this so many times over and over right from our early childhood days from our parents, teachers, superiors at work and so on.
Aim for the stars and you will at least reach the moon. This is another one of the most important lessons we have learnt in our lives.
Undoubtedly this has inspired us to achieve greater things in life. Some of us have become finest lawyers, Doctors, Chartered Accounts, Actors Entrepreneurs and Software Engineers.
We take this confidence with us of achieving, excelling in our lives when we start trading in the market.
Well, this is where the buck stops. The successful professionals, sports persons, actors being fed on this diet of “Rise above the average” rarely do well in stock trade.
We come in this market with confidence and zeal to rise above the rest. We sometimes double / triple our corpus in no time but we soon find out that the odds in favor of the successful achievement of superior returns consistently over a period of time are terrible. The years of gains are lost in one year and we end up loosing the part of the principal.
As we just saw in the little arithmetic exercise that with 280% gain in one year and then, not a moment too soon, caught by the full force of the downside leading to 70% loss next year actually leads to NETT loss of 16%. How it is possible? Well this is simple maths for you.
Most investors in stocks think that they can avoid the pitfalls of investing by due diligence and knowledge, trading stocks with alacrity to stay one step ahead of the game. They are just simply wrong. The most successful traders may achieve unusually large returns but for each big success, there must also be a big failure.
Reason being is that rules of stock trade are totally different. The only real formula for winning is “Aim for the average and you will stay above the average.” I see this as the only way of beating the heavily skewered odds against you. Stay average, don’t strive for overwhelming returns, diversify, don’t look for a needle in the haystack, own the entire hay stack and you will be the winner.
The bank rate of interest + the GDP growth is the return you should be aiming at. And combine this with periodic churning of stock by selling when there is an euphoria around you and buying when everything seems lost. And you could add 4% to this figure making the total to 17 – 18%.
Because most of us do not have the time, or the determination, or the mental equipment to embark upon such investing as a business. They should therefore be satisfied with the reasonably good return obtainable from a defensive portfolio, and they should stoutly resist the recurrent temptation to increase this return by deviating into other paths.
The real hero in the stock market is the one who could beat this figure not for one or two years or two or three years but consistently and regularly over a number of 10/15/20 years. With the power of compounding taking over, I have calculated that you can become a billionaire x 10 (1000 crores) in 20 years with a seed capital of 36.5 crores provided you are able to achieve sustainable 18% growth. Add 10 more years and your corpus grows to 5233 crores. These numbers are not figment of my imagination, this is simple high school maths for you.
There will be very few a real exceptions to this rule that would beat the market. Such kind of people are not aliens from another world. They are just like you and me with simple arithmetic skills and little luck on the side.