»Profit Hunter by Equitymaster

On This Day - 31 AUGUST 2022
The Smartest way to Invest in the Stock Market

What if you slowly and steadily become 1% better than what you were yesterday, every day?

The results are staggering over a year.

1% improvement compounded every day can be shown this way: 1.01^365 = 37.78.

This means if you make a 1% improvement per day, you are 37 times better off after a year. As opposed to 4.65 times on a simple interest basis.

Now that's a world of difference!

I'm sure you have heard of the Chinese bamboo.

After lying dormant for four to five years, the Chinese bamboo tree grows 80 feet (nearly 30m) in just six weeks.

The question is, did the tree lie dormant for four years only to grow exponentially in the fifth?

Or was the little tree growing underground? Was it developing firm roots and a stable support for its exponential growth in the fifth year and beyond?

{inlineads1}

Small progresses are highly underrated in investing.

And the ability to do nothing after you have made an investment is probably the most underrated qualities of an investor.

Investing gurus talk about buying the right stock. Some talk about selling stocks at the right time. But hardly anyone talks about holding stocks for years and decades.

This is why these words of Charlie Munger are like words from an investing bible to me...

  • The big money is not in the buying and selling, but in the waiting.

But with numbers, the truth behind this forecast becomes extremely hard hitting. Consider this chart of Titan...


Let's assume you bought the stock of Titan at the peak of the market cycle in June 2017. Over the next two years, until June 2019, the stock would have fetched 151%.

{inlineads2}

Again, let's assume you bought a year later in 2020, after the market crash and held on for a year, only to sell it in March 2021. The stock of Titan would have again fetched a very healthy return of 78%.

Finally, say you bought and held the stock for just nine months from April 2021 to January 2022. The resulting 80% gains would be commendable.

You would have done well on all three occasions. But the real kicker is the compounded 392% gains on the stock over three years.

The nearly 5x gains would make the stock eligible to be called a multibagger.

But the profits don't end there. Take a look at the taxes paid on profits.

By the end of the fifth year, if you sell the stock, almost 20% of the compounded profits, would be due to the government as taxes.

Saving taxes each year, year after year, tantamounts to interest free loans from the government.

By that logic aren't you better off keeping the interest free loans for yourself for years? Why would you want to hand over taxes on short term sales day in and day out?

Imagine the long term investors in Titan who amassed immense compounded wealth over decades.

{inlineads3}

They did not just see their portfolio swell. They enjoyed mouth-watering dividends consistently over the years.

And they also reinvested the taxes on the notional gains year after year at zero cost.

There cannot be a smarter way to allocate capital to stocks than long term investing. Like Munger says, the big money is in the waiting.

Warm regards,

Tanushree Banerjee
Tanushree Banerjee
Editor, StockSelect
Equitymaster Agora Research Private Limited (Research Analyst)

PS: When you buy stocks to hold forever, you must be sure that the quality of the business will also stay intact forever.

Screen quality stocks across market caps that are best suited to long term investing.

Watch my video on Forever Stocks to know how long term investing can change your life.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-6143 4055. Fax: +91-22-2202 8550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407