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The only way to make big profits
Fri, 24 Sep Pre-Open

Everyone wants to make above-average returns from stocks.

However, there's only one way to make really huge profits in the stock markets. And that is to be completely content with the fact that most people won't agree with any particular investment idea that you may have. This may sound surprising at first. More so, because most investors search for a consensus view of things before making any decision. But it is true nonetheless, as you will discover in the rest of the article.

You see, a stock's price is nothing but a function of demand and supply. At a particular price, let's say Rs 500, if most people expect the stock to fetch really big returns within a short time (like 100% or so), then its price wouldn't be Rs 500 in the first place. It will have already and instantly moved up to a much higher level. A level where the profits that can be achieved from that stock come down to a much lower range. Courtesy - demand being significantly more than supply. Demand for a share that is expected to fetch 100% returns in a short while will obviously be much more than the supply of such a share.

So if you yourself are expecting upwards of 100% returns from a stock (the doubling of a stock in other words), you should know while making the purchase that most people don't agree with you. Because as mentioned above, if most did indeed agree with you, the stock wouldn't be selling for that price in the first place.

But this seems to be quite a different from how things really work. Most investors spend considerable time searching for ideas where a lot of people agree with them. Only when they get a green signal from many different quarters do they consider it to be a great investment. In fact, that most people in the media and otherwise should agree with them is considered almost a necessary criterion for something to be considered a good investment.

Thus, it is only when the vast majority do not agree with you that you can get to buy a stock at a price that will give you those kind of supernormal returns. Do not expect such great profits to ever come from an idea that every second person in the papers and on television agrees with. Infact, to make above average returns over a long period of time necessarily means that most people did not agree with you at the time that you made each of those decisions.

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1 Responses to "The only way to make big profits"

J Chacko

Sep 23, 2010

Excellent article.

Equitymaster requests your view! Post a comment on "The only way to make big profits". Click here!

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