How to beat the stock market
Indian stock market? In the short term the answer may vary. However, over the long term – more than five years – it would undoubtedly be trying to beat the returns of the benchmark index. Why is that? It’s because of the continuous risk that individual investors have to take.
This risk could take many forms. Selecting individual stocks carries the risk of making a wrong decision. Deciding the weightages of stocks and sectors in a portfolio is another challenge.
There’s also the risk of having a market-cap bias in the portfolio. The greater the tilt towards small caps, the higher the risk. A portfolio intended to beat the market will have to take on some kind of risk, which will have to be maintained over the long term.
Even if all this is done well, there is still no guarantee that the portfolio will beat the benchmark. It’s no wonder that very few people manage to do better than the index over an entire investing career. In fact, we would go so far as to say that most investors who beat the index over the long term do so because of one or two stocks.
Excluding the gains from these stocks means the overall returns from a lifetime of investing may not be much better than the benchmark. One huge multibagger is enough to change the financial fortunes of an investor. A 100-bagger stock, if sufficient funds are committed to it, can ensure a comfortable retirement.
The contribution of all the other stocks to that investor’s portfolio would be nowhere near as important as the 100-bagger. You don’t have to take our word for it. Here’s what Benjamin Graham, the father of value investing and guru of Warren Buffett, said back in 1976.
Read more on livemint.com
