Back to Basics!
It’s that time of the market cycle — so many questions on where the markets are headed, should I book my gains & wait for a correction, should I buy U.S stocks again now, should I start investing into fixed income due to high yields…. to which admittedly, I have no right answer because I don’t know the future! All we have is a theory, but if our theory has any past precedence of being right, we’d be rich already & manage our own money, right?
However, what I do know is that sometimes it’s good to take a step back, zoom out on your timeline on your graph & take a longer view. Hence, time to go back to basics.
- Compound interest formula — Std VIII mathematics.
Let’s recall this famous formula that we learnt in school — A=P(1+r)^t
Where,
P = Principal (Amount invested)
r = rate of return (%)
t — Time (in years)
A = Amount (Market value)
Some may say that this is too basic. And it is indeed. But see where the exponentially comes from — it is from t i.e time, not from P & Not from R despite all our focus being there. Now here’s where it gets interesting — let’s assume monthly P = 100, r = 10% & t = 10 years. Simple enough? Let’s assume that this is a monthly SIP mode.
In normal circumstances, a SIP of Rs 100 for 10 years @ 10% CAGR fetches ~Rs 20,150/-
Now, I give you a choice that you can double any one of the components P/r/t. But only one of the three. Which one will give you the highest return of the lot?
It’s obvious the 1st choice would be double the t.
Surprised?
It’s P & not r! The thing that almost everyone focuses on ‘r’ is the last thing that creates more wealth. Doubling your P > doubling the r.
Control the controllable — you cannot control the r, no matter how obvious or how great the opportunity may seem but to a large extent you can control the P. A simple outing for a family of 4 if passed on saves Rs 5000 easily in today’s world. So, think — can you possibly save more? There is your answer to create larger wealth. Increase your savings & increase your timeline — you will create wealth.
2. Spend less time on forecasting, fortune telling. Instead, read more history.
‘History need not repeat itself but it often rhymes’ — a common saying you hear in the financial world. Primarily, this is because human emotion is constant across time & age — the swing between greed & fear. Napoleon said — The man who can do the average thing when everyone else around him is losing his mind is a genius.’ In my little experience in the investing world, I’ve realized that this is so true & relatable.
Quite often investors are sold on the long-term story & are ready to invest for 10 years or more but narratives built are such that it questions their holdings every other quarter. Whether it’s U.S inflation & FED raising rates, recession fears, FII’s selling out, elections in states/ centre, crude price exploding, etc — there is no end to events that trigger prices in the short run. 98% of the time of the investment is spent holding it. Events creates the urge to take action but it is often that ‘inaction’ that yields long term compounding. Bear in mind that holding/doing nothing is a conscious investment decision. Here’s where ‘think like a business-owner’ theory should be put to practise -detach yourself from the share price movement (easier said than done). Don’t try to chase the ’flavour of the month’ narratives (like it is defence stocks until recently, I.T at the end of CY2021, U.S tech stocks or pharma & healthcare in mid-2020) every couple of months a new sector or a set of companies will be the talk of the town — but there is no need to chase them along with the crowd. Most often, great prices are found when the company is completely out of favour. Don’t lose your purpose & timeline of investment.
Take a step back, reassess, think & then decide.
Article by:
Rushil Dedhia — Rushil is associated with Sapient for over 3 years and handles a diverse set of clients. He is an Electronics Engineer and also holds a Masters Degree in International Business. Rushil is an avid investor himself and has keen interest in cricket, football and travelling.
Credits: Anirudh Mehta @ Symphonia Wealth for his contribution to the article.
