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(Precious) Words of Wisdom : "Wall Street makes its money on ACTIVITY, you make your money on INACTIVITY." ~ Warren Buffett

Two biggest equity investing myths shattered

Belief 1: Investing in stocks is risky.

Belief 2: One has to "buy low, sell high" i.e. time the markets.

I am here to prove that, both these assumptions, are absolutely FALSE.

Let's not go by viewpoints, opinions or even personal experiences. They will not lead us to any meaningful or factual conclusions.

Instead, let us look at the hard facts... the actual numbers. Because, numbers don't lie.

Secondly, economic policies take time to unfold. Businesses have to spend years to expand and grow. Nothing, in the real economic world, happens overnight. Therefore, a 1-year, 3-year or even a decade of data, will not reveal the true picture. So, we look at numbers that go back, as far as, 35 years.

So, are you ready to be proved WRONG:

Fallacy No.1 : Equity investing is risky.
The table below gives the rolling returns of the Sensex — across 1, 5, 7, 10, 15 and 20 years of investment horizon — beginning Jan 1, 1980.

Data courtesy: HDFC Mutual Fund
As you will observe:
- Up to an investment period of around 10 years you "could lose money" in equity shares
- Losses, in the near term, can be huge
- As the time-frame increases, losses of 2-3% in the worst-case scenario, are not scary
- Around 10 years and beyond, the probability of losing money, drops to zero
- A 15-17% p.a. TAX-FREE returns from equity is a reasonable expectation over long term

NOTE:  I have used the words "could lose money"; I am still NOT saying "equity is risky".

I want to make two important points here:

First, losing money in the near term is not the fault of equity per se. Rather, the fault lies in our investment time frameDespite being fully aware of the "long-term benefits" of investing in equity, we repeatedly follow the short-term approach. Isn't this our short-sightedness?

We Indians are extremely patient. We put money in PPF for 15 years. We buy insurance policies and pay premiums regularly for 15-20 years. We start accumulating gold for our children, right from their birth till their marriage more than two decades away.

Unfortunately, when it comes to equity, we forget this patience. I wonder why? Isn't it high time that we changed this get-rich-quick mentality?

Second, we are always looking for shortcuts in the form of hot tips. Frankly speaking, it would be utter foolishness to believe that someone will simply hand us the key to riches. No one, NOT EVEN YOU, will do so. Therefore, if you really want to make money, you have to work hard for it.

We Indians are extremely hardworking. Just look at all the efforts we put in to become engineers, doctors, lawyers, MBAs, etc. Thereafter too, in our jobs, we put in long hours; for years and decades to become successful managers and entrepreneurs.

Unfortunately, when it comes to equity, we forget this diligence and discipline. I wonder why? Isn't it high time that we changed this lazy attitude? (Luckily, the mutual funds have made life lot simpler for us).

In short, investing in equity is not risky; risky is our total approach towards buying shares. Chasing dubious penny stocks, day-trading, banking on tips, short-term outlook, zero research, etc. are all signs of wrong "approach" to equity investing. Until we change that, we will keep losing money on the stock market.

Fallacy No.2 : Timing is important when investing in equity
Buy Low. Sell High. That's the mantra. Nothing wrong with it... except that... in reality it NEVER WORKS.

It is impossible to predict the bottom. It is impossible to predict the tops. (More on this later).

Anyway, even if someone can really time the markets, it is impossible that he gets it right 100% of the times. He will surely go wrong on a few occasions. 

Then what happens:  

Again, let us look at the hard facts... the numbers.

See the graph below. It gives the value of Rs.1 lakh...invested in Sensex on Jan 1, 1980... after 35 years, as on June 30, 2015. It assumes you were invested on all the days. And then it compares the same with the values, if you were absent from the market on 10, 20, 30, 40 and 50 best days i.e. when the market delivered maximum returns in one day.

Timing the market is the biggest investment mistake by most investors
Graph courtesy: HDFC Mutual Fund

As you will observe:
- If you were invested on all days, your investment would be worth more than Rs.2 crores
- If you were absent on 10 best days, you would have about Rs.70 lakhs in hand
- But, if out of "35 years" you missed a mere "50 best days", you would have made a totally miserable Rs.10 lakhs.


What a drop!

In short, you have to stay in the market EVERY DAY, month after month, year after year, and decade after decade. You cannot afford to miss even one good day in the market.

Moreover, I was just wondering:

When we have a market that is trending upwards for decades, can we say that there are "tops and bottoms"? The volatility that we see in the short-term, merely creates some intermittent peaks and valleys. These disappear as you keep expanding the time frame.

In short, there are NO tops and bottoms to predict. Those who try to foresee them, are only chasing an illusion.

So are you now convinced that...
... investing is equity is as safe as PPF, Insurance etc. (but with lot better returns)
... timing the market is a mirage that has no existence in the real world.

An Investment In Knowledge Pays The Best Interest ~ Benjamin Franklin

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