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ANATOMY OF THRIFT

Equity Investment

There's one big difference between people who make money from stocks,
and those who don't... And it's not the skill of picking the right stock every
time. It's how you allocate your portfolio

One of the most famous principle of investing given by Benjamin Graham is The
Market

is

Pendulum

that

forever

swings

between

unsustainable

optimism (which makes stock too expensive) and unjustified pessimism

(which makes them too cheap).The intelligent investor is a realist who
sells to optimists and buys from pessimists this clearly means that if you
invest with patience, faith you can take steady advantage of even the worst bear
market.

There is a great example of equity investments like your home you buy it at a set
price and hang on to it hoping the value of your home (equity) will increase and you
can sell it for more than you bought it for.

Equity Market the Indian scenario

Indian economy is today in a sweet spot. Indian equity markets have moved up by
more than 30 per cent in the last one year. The investments from FIIs have been
more than $13 billion in this calendar year. Domestic investors are back with equity
mutual funds receiving record flows in last six months.
Small cap index has delivered almost triple the return of large cap index and mid
cap index has given almost double the return of large cap index in the last year.
Many investors, especially ones in retail, feel left out as equity returns have zoomed

past other asset classes returns. The average long-term equity return in India is
16.2%.

How long is the Long Term?

Equity returns are not fixed and you must be prepared to stay invested for a few
years to get close to average return. But how long is that long term? How many
years? You will get a different answer depending on whom you ask. For the purpose
of capital gains tax, long-term is 1 year. But for most investors long-term means
anything between 3 and 10 years. Most investment advisors choose not to define
this term because they can hide behind the ambiguity when the investors portfolio
fails to perform.

Fig1: Risk returns data

In the above figure the returns are categorized as 8%, 10%, 12%, 15% and the
maximum return being 16.2%.The investment period

varies from 3-9 years. For

investment duration of 7 years, you have a high probability (67%) of achieving a

return greater than 15% and even higher probability (75%) of achieving a return
greater than 12%. At the same time, there is a low (but real) probability (21%) of
getting a return less than 8%.
Thus we can say that the probability of poor returns never completely
goes away but increasing your holding period improves the probability of
superior returns.

The Antidote to Market Volatility

Equity Investment is rewarding in the long term. However the short term volatility
can create obstacles to wealth building. Investor tends to respond to volatility by
changing their investment horizon. This approach rarely works .What generally
happens is a series of misses where losses are booked and profits are missed. There
are two ways to overcome this obstacle:-

One to choose instruments which do not allow them to exit at the first hint of

volatility. These could be tax saving-linked ELSS, NPS or ULIPS.

The second is to spot a few high quality mid-cap stocks with good
management, profitable operations, low leverage and high growth. After this
one should decide the fair value of the stocks. The whole idea here is to
implement profit booking and re enter with a disciplined process.

Thus keeping well-defined levels for each stock at which to book to book looses and
profits makes sure that one is not ambivalent after the levels are hit.

Conclusion
From the above discussion it clear that the key word for long term equity
investment is PATIENCE. The intelligent investor dreads a bull market
since it makes stock more costly to buy and conversely welcomes a bear
market, since it put stock back on sale.