Investment Strategies and Wealth Creation: What really works?

“The stock market is filled with individuals who know the price of everything, but the value of nothing.”– Phillip Fisher

How does it work?

Different people have different ways of investing in the market. People following a particular method have a rationale that supports it and seldom do they verify whether it holds true over a period of time. More often they find data to support their preferences. However, it is important to stress-test our beliefs about how we should invest.

Story of 3 brothers

Let’s understand this from the story of 3 brothers A, B & C. In 2006, they have given Rs 10 lakh each by their father. Their father runs a successful business and is generating lots of profits. He told them that they had the freedom to invest in any which way they want over the next 10+ years and depending on who grows the money the most will be in charge of the entire family wealth when he retires. The three brothers had very different temperament and chose very different ways of investing.

A. Back Winners

Mr. A believed in a backing winner and hence invested all the money in an asset class that earned the highest returns in the preceding year. He understood that all asset classes and funds underperform from time to time and hence it made sense to move money into that class that was performing the best and not simply buys and holds. Here’s how he performed in the 13 years period:-

Annual Portfolio Returns of Mr. A

Continue reading here...