What Do We Need To Understand?
Investment is an art. The simple rule to successful investing is to compound the money. Meaning that the longer you wait for a fundamentally strong company, the larger profits you reap. The weaker the fundamentals of a company, the weaker will be its long-term rate of share price compounding, and the weaker will be the rate of compounding. Now, why do many people go for blue-chip, or let’s say large-cap stocks? It is because the returns from the company will be stable during a normal market as well as during a market crash.
Let’s understand this with a cricketing example. Cricket players like Rahul Dravid whose career average in test cricket is over 50, regardless of whether the game is happening in India or abroad, in hot conditions or in cold. Therefore, if you are betting on Dravid, then your chances of winning the bet are equally high, regardless of where India is playing. Now, if you bet on someone who is less technically sound, than Dravid then your risks go higher. The batting average of the player will depend if India is playing at home or abroad, in hot or cold conditions etc. Therefore, with such batters, you will only bet on them if they are playing at home.
What Do We Understand?
With this cricketing example, we understand that if you bet on the best players, then your chances of winning are higher than the ones who are lower than average. You would be betting on the player and not the external conditions that might affect the player. The same goes for strong companies like Asian Paints, TCS etc. If you bet on Asian Paints, you will be concerned about the company, management, sales, revenue etc., and not what’s happening to the crude oil price. You are confident of your portfolio much more, and no amount of external noise will change your decision.
What Should Be Done?
There is a reason why out of 6,000 listed companies in India, just 10 companies account for 90% of the corporate profits generated in the Indian economy. If you invest in the top 10 companies, all you have to do then is wait. Your portfolio will appreciate in value with time because long-run stock returns are asymmetric. As Warren Buffett said, if you aren’t willing to hold it for ten years, do not hold it even for ten minutes.