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Where do you fit in?

Feb 6, 2004

We have always preached the virtues of having a long-term perspective in mind while investing in equities. Here, we have made an attempt to justify the same by taking a real life example. We have taken two stocks - Infosys and Dr Reddy's - and we have tracked the performance of the same over the last five years. Moreover, we have assumed two different types of investors viz. investor A and investor B with each having a different type of investment strategy. While investor A believes in buying when the markets hit bottom and selling when they are at peak, investor B does not worry about the state of the stock markets and has a long term horizon in mind. Let us see how each of the two investors have fared by sticking to their respective investment strategies. All the necessary consideration regarding stock splits and brokerages have been made while arriving at the results. Investor A: His style of investing has given him huge returns of 10,403% and 2,621% in Infosys and Dr Reddy's respectively over a five-year period. He has not done too badly on the compounded growth rate front either. While his investments in Infosys have grown at a CAGR of 154%, Dr Reddy's has fetched him a CAGR of 93% over the same five-year period.

Investor B: Although the performance of investor B pales in comparison to that of investor A, the returns that accrue to investor B over a five year period are substantially higher than what he would get after investing in any other investment avenue. While he would get returns to the tune of 3,592% and 106% on a normal and CAGR basis respectively in Infosys, the same would be 1,136% and 65% for investments in Dr Reddy.

  Investor A Investor B
  Point-to-point returns CAGR Point-to-point returns CAGR
Infosys 10403% 154% 3592% 106%
Dr Reddy 2621% 93% 1136% 65%

Thus, prima facie while it appears that investor A's style of investing gives much better returns, one also needs to look into the risks associated with his style of investing. Even the most astute financial analyst armed with the most sophisticated financial tools would feel no shame in accepting the fact that it's virtually impossible to time the ups and downs of the stock markets on a consistent basis. While we have hypothetically assumed that investor A has been able to buy at troughs and sell at peaks on a consistent basis over the last five years, it is highly improbable that he would have achieved this in real life, over a wide spectrum of stocks.

Moreover, the time and effort required in order to achieve such a feat (if at all one achieves it) makes is almost impossible for a retail investor to consider equity as a viable investment option. He then ultimately falls into the trap of brokers and fund managers who take him for a ride and put his hard earned money at serious risk.

Contrast this with the investment strategy of investor B. He considers equity as a long-term investment avenue and invests in companies with proactive and credible management and sound business model. He is of the opinion that if the company's management has a proven track record and the company is a leader in its field of business, notwithstanding the minor glitches, it will deliver in the long run and reward its shareholders with attractive returns in the form of both dividends as well as capital gains. Therefore, after identifying such a company and investing in it, he is spared of the agony of reconsidering his investment decisions every time the stock markets bloom or slide.

Thus, after bringing you face to face with both types of investors, it is you who has to decide which type of investor do you want to be.

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