India scored its first Test series victory in Australia. The credit for this victory to a great extent goes to Cheteshwar Pujara who played like a true champion.
Why am I talking about cricket when this forum is for investments? There is learning in the victory that I wish to draw attention to.
Who was more consistent batsman between Australia’s McGrath and India’s Sachin Tendulkar? Many of you would answer Sachin Tendulkar. This looks obvious, but it is not true. Between the two, the consistent batsman was McGrath. Tendulkar in an inning could score anywhere between zero to 200-plus, but one could not be too sure about how much Tendulkar would score in the next inning. On the other hand, McGrath, as we all know, would score anything between zero to 10 (his test career batting average is 7.4). We also know that it was easier to predict McGrath’s score in the next inning than predicting Tendulkar’s.
You should look at the difference between debt and equity investing in a similar way. The returns on debt are more predictable than equity. One knows what returns one would make at the end of the year and also the date on which the principal amount would be returned.
On the other hand, equity is unpredictable. No one knows for sure what kind of returns the equity portfolio would generate at the end of the year. Also, one is not sure whether the capital would come back or go down the drain.
Having said this, people make mistakes when it comes to taking sound investment decisions.
If you were asked to pick a batsman for a team between McGrath and Tendulkar, who would you choose? The obvious and sensible answer would be Tendulkar. That means, despite Tendulkar’s next inning score being less predictable, you know that over the longer period, Tendulkar would score more runs with higher average than McGrath. That makes me wonder why people prefer debt (McGrath)? They forgo higher returns to get consistency of returns.
Over the years, there are plenty of empirical evidences that prove that equity offers higher returns than debt instruments. The only problem with equity is that its returns are lumpy.
What holds true for the equity market also holds true for stocks. Many investors do get frustrated when the scrip they bought refuses to go up. They are quick to move out of the stock, thinking that they had made a wrong selection. They chase stocks that are flavor of the season. In cricketing parlance, it’s like chasing the ball outside the off stump. This kind of strategy more often than not proves detrimental to the health of the portfolio.
Investment takes its own time to play out. It may not happen in one year. Many a time, it takes many years together. Let me share with you my own experience. I had bought Bombay Burmah in February 2006 at Rs 72. After I bought the shares, the company’s share price started moving down, and after that fall, it moved sideways for the next 5-6 years. But I did not panic as I knew that the scrip had the potential to generate returns. I always follow two rules while investing. I look at the relationship between the cost and value, and risk and returns. I knew that the cost I had paid for the stock was much lower than the value I was getting. I also knew that the risk I was taking was much lower than the returns it can generate. Investors normally overestimate the value and underestimate the risk. Today, Bombay Burmah is quoting at Rs 1,300, creating manifold returns for me (my average cost of shares is Rs 48 as the company declared bonus in the ratio of 1:2 in 2012). I continue to hold the scrip.
Late Parag Parikh, the famous investor, once said at a Morningstar conference about the “law of farm”. He explained his theory of the law of farm at the event, saying “You cannot sow something today and reap tomorrow. A seed has to go through different seasons before it turns into a fully grown tree and starts bearing fruit. Value investing is boring.” Yes, investment is boring, just like the way Cheteshwar Pujara plays test cricket. But that boring technique yields plenty of runs. Equity investment is like a five-day cricket match. If you approach it like T20, you are bound to lose the match (investments).
I even admire Rohit Sharma’s batting style. He is one of the most smashing batsmen in the shorter version of the game. But he also understands that one must spend time on the pitch. One would have observed that Sharma’s first 50 runs take much longer time, but the next 50 runs come in almost half the number of balls taken for the first 50.
Equity is something similar. The first 20 per cent returns may frustrate you, but once the scrip starts moving up, it can go up many times in the next couple of years. The only catch here is that one should have done fair assessment of the parameters, namely, cost vs value and risk vs returns.
I would recommend playing like Pujara to make money on the stock market. Investment is a five-day match. Accept the fact that few overs would be maiden (means few months may not generate returns), but the returns will come when you dig your heels and play well.
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