Scams that rely on the concept of 'promising mouth watering' returns to investors are not unfamiliar. There have been several such schemes introduced in the past. What is worrying though is that many people seem to fall for them.
Let us say a potential investor is offered '100% assured returns' if he invests in this or that scheme. There are two aspects to this. One is the number; 100% return is certainly bound to catch his fancy.
But here we would like to focus on the other part that becomes equally hard to resist; the promise of a 'guaranteed' return. Why is that?
Let's face it. Nobody likes to suffer losses in any aspect of one's life. And when it comes to money and investments, losses become particularly hard to bear. For many investors, losing money on a single stock causes much heartache. This is even when many other stocks in their portfolios have generated quite handsome returns.
Hence, for these investors, the lure of 'guaranteed' returns sets their eyes glittering.
But what if we were to tell you that there is no such thing as a guarantee. Certainly not in the field of stock investing. For here, what matters really is the 'approach' to investing. This means that zeroing on fundamentally strong companies having businesses that you can understand, healthy financial track record and a sound management. Moreover, these businesses have to be bought at the right price.
This is the approach that will ultimately deliver healthy returns in the long term. But mind you, it will not be hunky dory all the way. Your stock portfolio will go through ups and downs. It will not move in a linear fashion. But if you have the conviction in the stocks that you have picked then near term swings in your portfolio are of not much consequence when you look at the bigger picture.
Just to reinforce this point further, I would like to draw your attention to an interesting article written by the authors of Morgan Stanley Investment Management and published in the Mint. This article has compared the returns generated by Madoff's scheme vis-a-vis those generated by Buffett's Berkshire Hathaway.
Bernie Madoff, as you would recall, has been imprisoned for running what is now famously known as the Ponzi scheme. Now, there was this fund called Fairfield Greenwich's Sentry Fund, which invested its entire corpus with Madoff. According to the article, in almost 18 years of running the fund, Fairfield beat the S&P 500 index by about 2% annualized. Further, it claimed 92% positive return months, with annual volatility of only 2.5%. The latter is quite low when compared to the S&P 500 index's volatility of 14%. On paper, it all seems very good. But we all know that Bernie Madoff's scheme was all a scam and there were no real investments to speak of.
Look at Berkshire Hathaway's performance. Its book value has outperformed the S&P 500 by 9.5% annualized over its 50 years of existence. However, it has not been good going during all the years. It has lagged the index in 11 of those years. But more importantly, Berkshire Hathaway has outperformed the index in every year in which the index yielded negative returns.
So you see what ultimately matters is safety of capital and the focus on earning decent returns on the stocks that you invest in rather than going in for that non-existing 'guaranteed' return. Need we say more?
By Radhika Pandit (MD Value pro)
Let us say a potential investor is offered '100% assured returns' if he invests in this or that scheme. There are two aspects to this. One is the number; 100% return is certainly bound to catch his fancy.
But here we would like to focus on the other part that becomes equally hard to resist; the promise of a 'guaranteed' return. Why is that?
Let's face it. Nobody likes to suffer losses in any aspect of one's life. And when it comes to money and investments, losses become particularly hard to bear. For many investors, losing money on a single stock causes much heartache. This is even when many other stocks in their portfolios have generated quite handsome returns.
Hence, for these investors, the lure of 'guaranteed' returns sets their eyes glittering.
But what if we were to tell you that there is no such thing as a guarantee. Certainly not in the field of stock investing. For here, what matters really is the 'approach' to investing. This means that zeroing on fundamentally strong companies having businesses that you can understand, healthy financial track record and a sound management. Moreover, these businesses have to be bought at the right price.
This is the approach that will ultimately deliver healthy returns in the long term. But mind you, it will not be hunky dory all the way. Your stock portfolio will go through ups and downs. It will not move in a linear fashion. But if you have the conviction in the stocks that you have picked then near term swings in your portfolio are of not much consequence when you look at the bigger picture.
Just to reinforce this point further, I would like to draw your attention to an interesting article written by the authors of Morgan Stanley Investment Management and published in the Mint. This article has compared the returns generated by Madoff's scheme vis-a-vis those generated by Buffett's Berkshire Hathaway.
Bernie Madoff, as you would recall, has been imprisoned for running what is now famously known as the Ponzi scheme. Now, there was this fund called Fairfield Greenwich's Sentry Fund, which invested its entire corpus with Madoff. According to the article, in almost 18 years of running the fund, Fairfield beat the S&P 500 index by about 2% annualized. Further, it claimed 92% positive return months, with annual volatility of only 2.5%. The latter is quite low when compared to the S&P 500 index's volatility of 14%. On paper, it all seems very good. But we all know that Bernie Madoff's scheme was all a scam and there were no real investments to speak of.
Look at Berkshire Hathaway's performance. Its book value has outperformed the S&P 500 by 9.5% annualized over its 50 years of existence. However, it has not been good going during all the years. It has lagged the index in 11 of those years. But more importantly, Berkshire Hathaway has outperformed the index in every year in which the index yielded negative returns.
So you see what ultimately matters is safety of capital and the focus on earning decent returns on the stocks that you invest in rather than going in for that non-existing 'guaranteed' return. Need we say more?
By Radhika Pandit (MD Value pro)
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