10 Truths of Stock Market – keep them in your mind and you will always make money.

 24^th October 2021

10 Truths of Stock Market – keep them in your mind and you will always make money.

Dear Fellow Travellers,

Namaste! I have come across a beautiful post on the market. I like sharing with you all. I have added the Indian perspective wherever I thought necessary so that you can relate to it and learn from the same. So, enjoy reading the same.

1. The long game is undefeated

There’s nothing the stock market hasn’t overcome.

“Over the long term, the stock market news will be good,” billionaire investor Warren Buffett, the greatest investor in history, wrote in an op-ed for The New York Times during the depths of the global financial crisis. “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

Since that op-ed was published, the market emerged from the global financial crisis. It’s also overcome a U.S. credit rating downgrade and a global pandemic among many other challenges. The Dow closed Thursday at 34,912, just 2% from its all-time high.

Btw, historically you didn’t have to wait a hundred years for positive returns. Since 1926, there’s never been a 20-year period where the stock market didn’t generate a positive return.

While stocks usually go up over much shorter periods, the odds of positive returns improve as you lengthen your time horizon.

If you look at the Indian market since 1991. We had Harshard Mehta Teji and Scam in 1992. 1995 /1997/2000/2008 – we have seen many falls but the Sensex which was around 1000 in 1991 has crossed 60000 today. So, investing long term in GOOD COMPANIES is always advantageous.

2. You can get smoked in the short-term

Bull markets come with lots of bumps in the road.

While the S&P 500 has usually generated positive annual returns, it’s also seen an average drawdown (i.e. a decline from its high) of 14% during those years.

Bear markets are no picnic either: They can happen quickly, as the S&P500’s 34% drop from February 19, 2020, to March 23, 2020; and they can happen painfully slowly, like the 57% decline from October 9, 2007, to March 9, 2009.

Investing for long-term returns means being able to stomach a lot of intermediate volatility.

Those who stayed invested and added in the 2018 fall and March 2020 fall – are having the best return in their long-term portfolio as of now.

3. Don’t ever expect average

If you see BSE Sensex has gone up around 16-17% CAGR since inception. It means the market has given an average return of 16-17% every year.

Now, if you keep this AVERAGE in your mind and invest – you will never get this return in the next year or year after that.

Just check the return of 2020 or 2021 or any year of your choice – you will rarely get this average figure in your yearly return.

However, if you hold for the long term – you will get this return or if you are smart – you can beat this return multi-fold.

4. Stocks offer asymmetric upside

A stock can only go down by 100%, but there’s no limit to how many times that value can multiply going up.

Yes, we’ve seen some pretty bad sell-offs in the stock market. But it’s gone up many-fold more. It’s not guaranteed, but it’s offered. From the low of 7500, nifty has moved to 18000 today.

I have seen the most educated people think in linear or logical patterns when they invest in stocks. That linear pattern is for the long term and not for a year or two.

5. Earnings drive stock prices

Any long-term move in-stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings.

News about the economy or policy moves markets to the degree they are expected to impact earnings. Earnings (a.k.a. profits) are why you invest in companies.

The buffet had said this beautifully – “Stock’s Market price is the slave of Company’s earnings.”

6. Valuations won’t tell you much about next year

There are many valuation methods that’ll help you estimate whether a stock or stock market is cheap or expensive. We won’t go through all of those here.

While valuation methods may tell you something about long-term returns, most tell you almost nothing about where prices are headed in the next 12 months. Over short periods like this, expensive things can get more expensive, and cheap things can get cheaper.

It’s worth noting that prices can be cheap or expensive for extended periods of time. In fact, some folks would argue valuations are not mean-reverting.

You must read the above 2 times. This is the fact.

7. There will always be something to worry about

Investing in stocks is risky, which is why the returns are relatively high.

Even in the most favorable market conditions, there will always be something keeping the most risk-averse folks on the sidelines.

As long as you are alive there is always a fear of dying but you don’t stop living. Same way keep on investing in good companies.

8. The most destabilizing risks are the ones people aren’t talking about

Surveys of market participants will yield lists of top risks, and ironically the most commonly cited risks are the ones that are already priced into the markets.

It’s the risks no one is talking about or few are concerned about that’ll rock markets when they come to the surface.

You must keep this in mind always.

9. There’s a lot of turnover in the stock market

Just as most businesses don’t last forever, most stocks aren’t in the market forever. The S&P 500 sees lots of turnovers (i.e. failing businesses get dropped and up-and-coming businesses get added).

In fact, it’s the addition of new and unexpected companies that have been driving much of the S&P 500’s returns over the past decade.

We have also seen make-over of SENSEX, Nifty 50, and other indices from time to time.

10. The stock market is and isn’t the economy

While the U.S. stock market’s performance is closely tied to the trajectory of the U.S. economy, they’re not the same thing. 

The economy reflects all of the business being conducted in the U.S. while the market reflects the performance of the biggest companies — which typically have access to lower-cost financing and have the scale to source goods and labour more cheaply. 

Importantly, many of these bigger companies that make up the stock market do at least some business overseas where growth prospects may be better than in the U.S.

The same things are applicable to India. For the last so many years IT stocks have been generating decent returns as they were earning money from outside India. So, the Indian economy’s performance may or may not impact their price much.

What NEXT?

If you keep the above TRUTHS in your mind and heart which investing / after investing – you will never fall into the TRAP of big investors.

Have a great investing.

Follow me on Twitter @hiteshmparikh or on Whatsapp - +91-9869425399.

 

Live With Passion…Invest With Passion.

 

 

Hitesh Parikh.