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Investing: Are you playing catch-up?

Jul 4, 2006

Question: If you had bought Zee Tele at its peak of Rs 1,550 (adjust for bonus/splits) in February 2000, and still held it on June 2006 (when it closed at Rs 241), how long would you it take you to get back to your purchase price at various annual rates of return? Answer: Even at a decent 10% annual rate of return, it would take you just under 20 years to break even in this overpriced purchase!

In this context of paying more than what a stock deserves, the legendary investor, Ben Graham, stated that risk lies not in our stocks, but within us. If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it does not matter what you own or how the market performs.

Here is another example of how an overpriced investment can 'forcibly' make a 'long-term' investor out of you! Imagine that you find a stock that you believe can grow at 20% a year even if the market only grows by 10% annually. Unfortunately, you are so enthusiastic that you pay too high a price, and the stock loses 50% of its value in the first year itself. Now, even if the stock generates double the market's return during the future years, it will take you 12 years to overtake the market, simply because you paid too much, and lost too much! (See adjacent chart)

We believe that more of such examples, and less of 'investing tutorials' can help you, the investor take a better judgmental call on your risk taking abilities. Investing in equities need to be undertaken to meet your long term financial goals, and not for playing an 'averaging' game only to lower your earlier 'too higher' a cost for a stock.

Well, losing some money is an inevitable part of investing, and there is nothing in the world that you can do to prevent it. However, it would be intelligent of you to take responsibility for ensuring that you never lose most of all of your money. Happy investing!


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