Many investors believe that direct stocks offer more attractive returns than mutual funds and PMS. This argument gets more heated especially during bull markets like the current one. In the initial phases of bull markets, people compare direct stocks versus mutual funds and PMS and eventually they compare it with IPOs and bitcoins.
Multi-baggers are available dime a dozen in this kind of market but investors need to figure out what is more important for them - longevity or multi-baggers! Doubling/tripling/five time or 10 times growth or growing your wealth over a longer period!
How long is investors’ investing life – 1, 3,5,10 and 50 years? Let assume that an investor looks to grow his money as number of times with the number of years invested. For instance, if he is looking at investing for 10 years then his expectation is 10 time returns. Let us look at the CAGR he needs to generate to achieve these numbers:
No of years Expected Expected
Returns CAGR
1 Year 2 times 100%
3 Years 3 times 58.75%
5 Years 5 times 43.10%
10 Years 10 times 27.10%
15 Years 15 times 20.31%
20 Years 20 times 16.45%
30 Years 30 times 12.13%
40 Years 40 times 09.73%
50 Years 50 times 08.19%
100 Years 100 times 04.73%
Clearly, the chances of achieving higher returns get high with the increase in the number of investment years. Also, investing is far more nuanced. It is so obvious that it is not visible to many.
Even with low CAGR, the investment starts to grow substantially over a longer time horizon. The most important and very difficult risk to understand in investing is the risk of reinvestment. Getting reinvestment opportunities over a longer period is very difficult and challenging thing, which most investors are not even aware of.
Very few people know that in most markets, only 5/7% stocks have delivered compounding returns over longer period. How good you are in identifying such opportunities consistently!
On the other hand, we have mutual funds with history of 20/25/30 and even 35 years with compounding around 16% to 22%.
Focus on longevity and compounding. Multi baggers is just a passing phase. The challenge with multi-baggers is that they go as they come.
Do not miss wood for the trees.
Vijai Mantri is Chief Investment Strategist and Co-Promoter, JRL Money. The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.