“Share market itna gehra kuan hain jo pure desh ki paise ki pyaas bujha sakta hai”
- Prateek Gandhi as Harshad Mehta in hit series Scam 1992
While this statement by the infamous stockbroker isn’t completely incorrect, it can lead to a false sense of expectations of returns that an individual or a firm can expect to gain from the stock market.
And this expectation is one of the biggest reasons, among others, why most traders and investors lose their capital. In the expectation and anticipation of massive returns, many can get frustrated with the market, take irrational decisions, lose their capital and then associate the stock market with a casino.
To put in perspective, world famous investor Warren Buffett’s portfolio had a compounded annual growth rate (CAGR) of 19.1% over 50+ years. What this means is his entire portfolio’s worth increased by 19.1% compounded every year.
For instance,his ₹100 today would be worth ₹119.1 next year, ₹141.2 after the second year, ₹168.2 after the third year and ₹200.3 in the fourth year. Even a legendary investor like Warren Buffett would’ve taken four years to double his initial investment. On the contrary, beginners and amateurs are expecting overnight ‘paisa double’ returns.
But it’s not all bad news for aspiring investors.
As Albert Einstein once said, “compounding is the 8th wonder of the wonder”, and the magic of compounding is one that few understand and fewer capitalise on. As illustrated with Warren Buffet’s growth, his capital does not multiply by a fixed amount every year but increases exponentially, ensuring higher returns the longer he remains invested with his rate of growth.
The same applies for the ordinary investor too, the longer one remains invested in one’s portfolio, he/she is bound to see massive returns over the course of time. But that’s the important part, it’ll take time for results to show; for thousands to become lakhs and for lakhs to become crores.
And even if one feels he/she does not have the brains of a Warren Buffett, the fact that the Nifty, the index comprising on NSE’s 50 best companies have returned a CAGR of 16.1% from 1979 to 2019 is an indication that the Indian markets can easily create a lot of wealth and it’s just a matter of time and patience.