Who should invest in the Equity market?
12 December 2023
Anyone who satisfies below conditions is likely to be successful investing in the Equity market.
Invest money NOT needed in the next 3-5 years: Market may remain irrational for a long period of time and you may be forced to pull the money out of the market at the wrong time, in case money invested in the market is required earlier.
Expect lumpy returns: Do not expect liner returns: In order to invest at a reasonable valuation, we are likely to invest in companies temporarily out of favour or companies investing in R&D / capex for the future or changing business models to be more profitable in future. It may take some time before all these efforts are reflected in the bottomline (meanwhile stock price may remain depressed) and the market recognizes the real potential of the company. That’s why an investment period of 3-5 years is required.
All companies will give you good returns: Even good investors are not right in more than 50% of investments. Expect 1-2 companies to give bumper returns, about 50% companies to outperform the market, 20-30% to give market returns and 20-30% to underperform the market. Overall on a portfolio basis, expect 15-18% or 2-3% outperformance to stock indices on a 3-5 years rolling cycle.
Be ready to see drawdowns of 30-40% in individual companies. This could be due to wrong selection of companies or market sentiments. In case of wrong selection, it is important to identify the mistake and cut the losses as soon as possible.
To be successful in investing, you do not need to have a high IQ. As long as you know what you are doing, you know what you do not know, having a good temperament and long term view will help in successful investing.
Happy Investing!
