How to invest in stocks using evidence-based investing framework
Engineering, physics, chemistry are all guided by laws, there is very little controversy. Finance on the other hand is guided a lot by human behavior. For every convincing explanation there is an equally convincing rebuttal.
It’s one of the greatest shows on earth, what’s not to be fascinated!
‘For higher returns’ is the most-oft received response. And that’s a good answer, there is enough evidence across all world markets to suggest that equities have out-performed other asset classes over long periods of time. INR 100 invested on 1st Jan’93 in the BSE Sensex is INR 2,600 in Sep’23 — that’s a 2500% absolute return with an 11.2 % CAGR.
My follow-up question is what do you mean by higher returns? Most experienced and savvy investors respond within a range of 12 — 15% CAGR.
They have internalized the power of compounding — it’s not just an academic concept — they also understand that this range is not easy to achieve over long periods of time. Legendary investor Warren Buffet is often quoted as saying, “My wealth has come from a combination of living in America, some lucky genes and compound interest”. And while that may be a very humble statement, as you cannot take away his remarkable astuteness and flare, it’s not very far from the truth.
However, many of us, look towards equity markets for returns that are unrealistic.
When anyone gives an out of whack expectation, I like to remind them that Berkshire Hathway’s incredible performance is an annualized return of 19.8% from 1965, until recently. Are you going to beat that? Yes, maybe you could, but let’s keep the probability realistic. Last 10-year returns of Indian Equity markets is a good benchmark to keep in mind when you are setting your expectations.
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