I have observed that people have a great fascination for the tips they get from others to invest their money. Without investigating the company’s profile, its financials, management, and growth prospects, they just invest their hard-earned money blindly and regret later when the stock price tumbles down heavily.
Ironically, when they buy a smartphone online, they choose to evaluate its specifications closely, compare its prices on other available platforms, take feedback from the ones who are using it already and then buy it with due diligence. Even if they get a tip that Samsung Galaxy is better than Apple iPhone, yet they choose to do their proper homework before taking a buying decision. Shouldn’t they replicate the same behavior while picking stocks as well?
I have observed that a lot of people tend to lose money on their investments in top performing funds. The reason is not the performance of the fund but the temperament of the investor himself. You would think why would an investor lose his/her money in the best performing fund.
The reasons can be plenty but I would highlight some of the reasons below:
It’s because of investor’s inability to hold onto his/her investments for a long period of time. By saying a long period of time, I generally mean a minimum time span of 10-15 years. You need to give at least this much time to your investments in order to build a huge wealth.
Secondly, I believe that people tend to buy when the markets are rising. They prefer to buy in the bull markets when the prices are too high and sell them in panic whenever a crash happens.
Apart from that, people generally get impatient and sell their investments in a year or two if they don’t get to see much appreciation in their wealth. They need to understand that building wealth is a long-term process. Even a baby can’t be produced in one day.
The thumb rule is: Unless you don’t learn to sit tight on your investments and sell them in panic, you’ll keep on losing your money.
I am sure that all of you must have heard about the famous Manhattan Island in New York City. It’s one of the financial and commercial centers of America which also includes the iconic Empire State Building as well as Times Square.
But do you really know how much did Indians of Manhattan get from immigrants by selling it in 1626? Just$24.
Yes, Indians of Manhattan sold the whole island for $24. Today, the book value of the whole land is worth $30-Billion (as per reports). And if you believe the market reports, the value of the land should be double the book-value i.e. $60-Billion. The value appreciated by whopping 216666666567% in these many years. Big deal, right?
Hold on. Let me show you the other side of the story.
What if the Indians of Manhattan had invested those $24 in 1626 at the rate of 8%? Well, the amount of $24, compounded annually at the rate of 8% in a time period of 1626-2017, would have been worth $281-Trillion. Money would have compounded for whopping 391 years.
Had they invested it at 7%, the final amount would have been $7.4-Trillion. And that’s the difference a minute change in percentage makes. A difference of 1% CAGR would have reduced the final amount by a huge margin of $273.6-Trillion.
Lessons to be learned from this story:
Always take a long-term perspective while investing your money.
Let your money compound for a long period of time. It’s when it works best.
Guys, let me share a success story of a woman who made millions by staying patient and calm in a stock market.
Her exceptional investing journey is a lesson for all investors who get panicked by the ups and downs of stock markets and reap the profits/losses by thinking short-term. She is a true example of buy and hold strategy. During her investing career, she hardly sold her holdings. One can learn from her the buy-and-hold strategy.
Let’s read her story.
Anne Scheiber, born in 1893, was an auditor in IRS and made not more than $4000 a year. Being a Jewish as well as a woman, she hardly got any promotion in her career and retired with a corpus of $5000 and an annual pension of around $3100 per year.
With a frugal lifestyle and high savings, she started her journey with a buy-and-hold strategy. As she had an ample amount of time in her retirement phase, she picked up some marvelous dividend paying companies(Coca Cola, Abbott, Pfizer etc) during the course of time.
Anne Scheiber Portfolio
At the time of her death, at the age of 101, her portfolio valuation was around $22 Million.
The biggest secret behind her success was the time she gave her investments to grow and patience to hold on. She never interrupted the process of compounding and let her portfolio grow by giving it a huge time period of 50 years.
What can you learn from Anne Scheiber?
All we can learn from her is – Being Patient. Just buy good companies and hold them forever. Never interrupt the cycle of compounding. You’ll reap the benefits of compounding.
Well, this is the question I get asked many times at my workplace from my numerous colleagues as well as friends.
What I have seen in my investing career is that people tend to own as many stocks as they can. Without keeping a check on the performance of those stocks, they keep on adding new stocks which they find in newspaper clips or as tips from friends. In fact, I personally know a friend of mine who owns around 120 stocks in his portfolio. Does he really need to over-diversify his portfolio in order to earn money from stocks? No!! Over-diversification just dilutes the returns. In other words, it’s not even diversification. It’s di-worsification (a word given by Peter Lynch).
Too many stocks in a portfolio minimize your returns. Whereas, if someone holds too less, it may get exposed to a risk of underperformance. Because even if a single stock underperforms, it will drag down the performance of the whole portfolio.
The question is – How many stocks should be added to a portfolio? Ideally, one should have 10-15 stocks in a portfolio. Selecting a range of stocks from diversified sectors and industries tend to give stellar returns. A concentrated portfolio tends to perform better than an over-diversified portfolio.
I am not saying that you can’t keep more than 15 stocks in your portfolio. Of course, you can but it shouldn’t hamper your portfolio’s performance. As long as you are okay with your performance, you can add as many stocks in your portfolio as you can.
Benefits of keeping a concentrated portfolio
Listed below are few of the advantages of keeping a concentrated portfolio.
Rocking Performance: If a selection of stocks is done with proper due diligence and research, you tend to gain a lot of profits from the performance of those stocks. All you have to follow is – Buy Right, Sit Tight – philosophy. You just need to buy your picks and hold onto it for a long period of time in order to achieve maximum gains.
Effective Monitoring and Research: With less number of stocks in a portfolio, you’ll be able to monitor your portfolio effectively. With a large portfolio, monitoring the stories of each stock can become cumbersome.
So make sure that you don’t play with your returns by over diversifying your portfolio. A healthy portfolio of 10-15 stocks will work really well for you in the long term.
A few days ago, I was having a conversation with one of my friends who happens to be in contact since 2013. He asked me about my work schedule and the week plan. And below is my response.
I read 2 Newspapers daily while traveling to the office (Economic Times & Livemint)
Try to find out extra time from my work schedule and spend it on reading the latest affairs and other news articles
Try to read 2-3 Financial and Annual Statements during the week
I minimize my distractions (Whatsapp, Facebook Notifications etc) by indulging in more productive work
I try to finish my office work well before time and spend extra hours in gaining financial knowledge as well as domain depth
I love reading. So I dig into the latest articles of the blogs every time I get free time. I try to read about the emerging companies which can be the potential multi-baggers in future
I love to connect with like-minded people. It ensures that I remain on track and stay updated
I read a book while traveling back from the office. Sometimes, I take the printout of the important articles and read while going back home
I stay away from things which are a waste of time such as websites which don’t contain any informative content
I give due attention to my body and stay in shape by gymming 4-5 days a week. I try to minimize the intake of sugary as well as fatty food in order to stay healthy. I strongly recommend you to Eat Clean, Workout Mean and Stay Lean.
I read about companies in which I intend to invest. I try to delve as much deep as I can in order to find out the relevant information about the companies. Frankly speaking, I try to make my portfolio concentrated rather than searching for every investment opportunity. A well-concentrated portfolio of 12-18 companies is enough to make you Rich
I don’t track the markets daily. I do the thorough analysis of the company by reading its Balance Sheet, P/L Statement, Cash Flow Statement, Annual Statements, Directors Analysis Report and other documents by downloading them from their websites
To avoid boredom, I watch Standup Comedy, Cartoon Network Shows such as Tom & Jerry and other informative videos on Youtube
During weekends, I spend my time with my family, cook food, go out for an outing or watch a movie flick. I connect with my relatives and friends through phone calls. During a long weekend, I prefer to go for a vacation and explore places
I keep a track of things happening in India or worldwide such as political advancements, economic affairs, etc.
Last but not the least, I make sure that I stay positive with my thoughts throughout the day