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The Equitymaster Research Digest

You Don't Need a 100% Success Rate for Permanent Wealth
Mar 21, 2017

  • 20% upside to Sensex 40,000?
  • 40% correction post Notebandi: Is this small cap a screaming buy?
  • Apurva's cricket-inspired trading strategy

Permanent wealth.

That's our goal here. We are trying to buy stocks that we will hold for the long term and will leave us with permanent wealth.To create permanent wealth with stocks, you have to know at the outset that your success rate is not going to be 100%. That is not going to happen... Even the most-seasoned blue-chip companies will lose money occasionally. Due to a temporary slump in the earnings cycle, perhaps. Or poor sentiments around the business.

You need to be okay with this. Knowing that you will lose some means your mission is simple: Make sure your winners are big and more frequent than your losers. This is where most investors fail. But that doesn't have to be you... I always tell subscribers the simplest way to weigh the risks and rewards of a business is to look at the long-term trends objectively.

The Equitymaster Risk Matrix (ERM®) can offer a surprisingly helpful pictorial depiction of that.

But even then, assumptions will at times go wrong. Earnings cycles can take longer than you expect to revive... managements can go way wrong with capital allocation...new products may not get accepted well.

That's why we cut our losers early. We want to make sure they stay small. But here's the thing...

You can still get amazing results without a 100% success rate.

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