Tuesday, May 20, 2008


When markets are down and everyone from television analysts to the man on the street are painting a doomsday scenario, it makes sense to step back and take a look at the larger picture.

Since its inception in 1979 has moved from a base of 100 to around 17,000 at present. The compounded annual growth rate works out to 19% p.a. It has been a roller coaster ride, as anyone who has been in the markets long enough will attest. Along the way many investors have been wiped out, many new investors have entered and old ones have given up on stock markets as a den of thieves and manipulators. (The word “investor” is used in the generic sense and includes both long and short term investors, day traders and speculators). But the ones who have made money are those that have stayed invested through market ups and downs.

So what lessons does history teach us:

1. In the long run stocks of superior companies have outperformed any other alternate investments.
2. Stocks bought without researching and analyzing the rationale behind the investment are almost certain to eventually lose money.
3. Concentration on any one sector should be avoided at all costs. Moderate diversification is the key to long term success in the markets.
4. Remaining invested in the markets is more important than timing the markets in the case of long term investors with clearly defined goals.
5. Compounding in the long run makes wealth grow exponentially.
6. Do not borrow to invest.
7. Invest in the markets what you are likely to not need for the next 3 years.

Although it is extremely difficult to keep your head when everyone else around you is losing theirs in a sharp market downturn, we have enough evidence to prove that is where investors have made the most money.

A good strategy would be to pick 5-6 good stocks, market leaders across various industries or diversified mutual funds and invest a fixed amount of money every month in purchasing shares or units. In a market downtrend this means buying shares of great companies at reasonable prices. The advantage of picking solid companies being that their very size and stability gives you the conviction to hold patiently and even buy more during volatile times.

The big picture tells us that in spite of major upheavals and calamities that have occurred in the past, stock markets have always bounced back and rewarded investors who have held on through the pain. Therefore learn from history and grow rich.