Loaned conviction is one of the most dangerous things in equity investing. When the sky falls (or appears to), you do not have anything to hold on to. And then the blame game starts of how you were tricked into the financial blunder, directly or indirectly. Most of us are familiar with equity investing mantras such as “buy on the dip”, “invest for the long term”, “bet on equities”, and many such. Without being repetitive on those, this post is all about showing some interesting facts and figures from which you derive your conviction while investing.
Just a disclaimer, this post is not about entry or exit strategy. You might counter-argue with facts like “holding forever”. The information I provide here is only to surface the obvious which alarmingly is not always part of our investment decision-making.
Number 1 – The stock market eventually goes up, always! I love this representation from the book The Psychology of Money (by Morgan Housel) which also happens to be one of the most enriching books I have ever read.
The gray bands indicate the dip below the last high and the time it took to breach it again. Some are thick (in a bear market or a sideways market), and some are extremely thin (in a bull run). But the data shows, eventually they move up.
Number 2 – If you missed the best performing day in the stock market each year in the last 2 decades, (the 2000s and 2010s), your corpus would be 1/3rd of what it would have been if you have stayed invested throughout. That’s just 20 odd good days of the market! Quite unbelievable isn’t it? It even gets worse (close to an 80% dip of your corpus) if you stay on the sideline for the best week each year.
The numbers can be crunched from Nifytindices.com, and here is a post from where I borrowed the data.
Number 3 – The greater the investment horizon, the less risky your bets are. I have explained Rolling Returns in detail in one of my earlier posts on Index Mutual Fund investing. The evident fact is, as you stretch your investment horizon, the percentage returns of your portfolio go up.
Number 4 – CAGR (Compound Annual Growth Rate) is a good metric for measuring the performance of your stock, fund, or index. As the Investopedia article explains, it provides a “smoothed” rate of return picture that more accurately represents the past health of your instrument. The stock market (the broader index) never makes linear growth. Neither does the best of growth stocks. Chasing linear growth leads to depreciating conviction and frustrating lane switches (Ever stood in queues and felt the other queue is running fast, only to switch and see it slow down ?!)
Number 5 – It is likely for good individual stocks to stagnate for an extended period before the next run-up. Two of the heavyweights in the NIFTY index, HDFC and ITC can serve as examples (so also I’m sure many other stocks). The below chart shows some multi-year pauses in the stock. ITC especially has been a target of ridicule and infinite memes before it proved everyone wrong.
The point is not to hold on to any underperforming stock, but rather hold fundamentally strong business stocks to catch up on the price in the long run to provide great CAGR returns.
Number 6 – Internalize the difference between notional loss and actual loss. Notional loss is the unrealized loss in our portfolio that worries you. It leads to irrational and at times panic selling. There’s a quote that is effective replaying in your mind now and then – “At the end what matters is when you bought and when you sold. Rest everything is noise”.
Number 7 – Words of investing genius Peter Lynch (not verbatim) You do not need to have a 100% hit rate in investment. Ask yourself, if you have 10 stocks in your portfolio, 6 are giving strong returns, and 4 are duds, and your overall portfolio appreciation is good, do you fret over the duds? It is wise to use this judgment while trying to do panic reshuffling. A loose comparison can be drawn with any stock market index. The NIFTY index portfolio shuffling decision is made twice every year, but over the journey of NIFTY from 1000 to 15000, 12 stocks have stood the test of time [Source]. In fact, indices growth are driven by different stocks and sectors at different point in time.
I finally leave with the classic market cycle of fear and greed emotions. If you have been around investing for a while just like me, it is quite likely you would have experienced this at some point in your investment history.
