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I should point out that the perfect investor does not exist. Investors and traders must face volatility, drawdowns, flat periods in their trading/investing. The perfect investor will adjust to each of the adversities with agility, adapating quickly to new surroundings. But, the relity is likely to be different.
A lot of investing/trading performance has to do with management of expectations. We base our expectations of returns on previous history.
Returns on the Nifty
Let us assume that the perfect investor bought the Nifty right at the bear market low of 850 in September 2001. Almost 8 years later, the investor is looking at Nifty 4650, a gain of 3800 points, giving a return of 26.7% compounded annually. This is when the purchase was made at the absolute low.
Now, 26.7% is better, much better than interest on bank FD’s.
If the Nifty were to continue growing at this rate (26.7%), after another 8 years, the Index will stand at 30879 (This is the Nifty, not the Sensex!). This is also the magic of compounding. This also assumes that you are not taking any money out of the profits, everything is getting compounded.
Here are some thoughts for us:
1. What are our expectations from investing? 26.7% per annum or more?
2. Are we compounding our gains?
3. Will the next 8 years see the same kind of gains as the past 8 years. In 2001 we started off with a low base. In 2009, we start off with the ‘India Story’.
Personal experiences
I receive many visitors who wish to trade. I talk with them, trying to find out their reasons for trading. In most cases, it is the urge to make ‘easy and quick money’. Often, they really need the money. My advice is: if you have a passion for trading, then trade small to get the required experience. For your monetary needs, please do not expect trading to meet them.
And expectations? Someone invests Rs three lakhs and wishes to meet the monthly expenses of Rs 25,000. This is really 100 % return per annum!
I always explain that trading is not meant for them. Many people listen, but many others go away to get the services of someone else. For those who insist on trading, the end result is always a substantial loss of capital.
Trading must be done always with spare money which is not needed by the trader to meet his regular expenses.In the initial years, there is a learning process so there should be no expectations.