Investment

Is long-term investing only about compounding?

Published

1 year ago

September 14, 2023

One of the most valuable yet frequently misunderstood pieces of advice in the realm of equity investing is the notion of “investing for the long term.” However, the question that often arises is: What does long term truly mean? The concept of long-term investing is open to interpretation and is often contingent upon the type of investment involved.

In the world of mutual funds, many investors consider any period exceeding five years as the benchmark for long-term commitment. On the other hand, retail investors engaged in direct equity trading may perceive anything beyond a year as a long-term horizon. Nonetheless, it is the most discerning of equity investors who recognize that the long term is essentially a sh

The importance of long-term investing in achieving investment success is now widely acknowledged. Many investors attribute this significance primarily to the power of compounding, a well-established catalyst for wealth accumulation. However, what often goes unnoticed is that long-term investing is not just about compounding but also plays a pivotal role in managing risk and mitigating potential downsides.

In fact, the concept of long-term investing is intricately linked to effective risk management, and this risk mitigation aspect is equally vital in the pursuit of long-term wealth creation.

In the realm of investing, risk takes various forms and sizes, but for the purpose of this discussion, we’re focusing on volatility as a representation of total risk to an investment. The ability to comprehend and effectively manage volatility is a crucial factor in achieving investment success. Volatility, in essence, is not an adversary but a valuable ally.

Volatility represents the non-linear fluctuations in returns that have the potential to generate significant gains for investors. Yet, it’s essential to recognize that this same volatility can also trigger impulsive actions that lead to unwarranted investment decisions. This propensity to act in response to volatility often results in investors prioritizing short-term loss avoidance at the expense of long-term wealth creation.

To illustrate this perspective, we’ve prepared a table (see graphic). In this analysis, Fisdom Research conducted a backtest to examine the returns that investors would have achieved by investing in the Nifty 50 index at various points in time and holding their investments for different time periods. This study encompasses all instances since the inception date of the index.

The above illustration clearly demonstrates a significant trend: as an investor’s holding period extends from 1 year to a longer tenure of 10 years, the likelihood of exiting with a profit approaches nearly one hundred percent. Furthermore, when examining instances where investors do incur losses, it becomes evident that the magnitude of those losses decreases as the investment horizon extends.

Standard deviation here serves as a measure of volatility. Consequently, as the investment horizon lengthens, the degree of volatility diminishes. A straightforward way to visualize this concept is to compare the Nifty 50 chart for a specific day with the same day on a longer chart, such as a 5-year chart. Doing so will reveal that while the daily chart may appear highly volatile, on the 5-year chart, the same day is a mere blip on a considerably smoother, less volatile curve.

While patience is often cited as the key virtue needed to navigate through periods of volatility, it’s actually conviction that defines resilience through volatile times.

Volatility serves as a litmus test for one’s conviction in their investment strategy. Once conviction is established, it becomes far easier to maintain the patience required to see investments through turbulence. Patience is a behavioural trait while conviction is intellectual one. Patience, when not supported by conviction, could lead to inaction and consequently ineffective investment management. However, conviction can be tested from an objective standpoint, periodically.

It is important for investors to realise that investment success is defined within oneself first and then impacted by externalities. Have good reason to believe and once there is, stick to it till the reason is proven inadequate or irrelevant.

Nirav Karkera is head of research at Fisdom.

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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

Published

7 days ago

November 6, 2024

Anne Joseph

NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

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Investment

S&P/TSX composite up more than 100 points, U.S. stock markets mixed

Published

4 weeks ago

October 16, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

Published

1 month ago

October 11, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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