TANSTAAFL: This Should Be Your Motto

Everything in life comes with a price tag. You pay money for a car, spend time building a relationship, and put years of effort into getting your dream job. And we all pay these prices willingly. Think about it. Nothing in the world is free.

It’s the same with investment returns. It does have a price, you just need to figure out what that price is, and whether you are willing to pay it. Let me explain.

The BSE Sensex increased 20-fold in the 20 years from 2002 to 2022. Investing is easy, right? Keep holding these stocks and sit back to get 20x return from compounding. Sounds like free money with zero cost and effort, just simple long-term investing.

Where is the price?

News Flash: Indian stock markets crashed in 9 out of these 20 years.

Markets are volatile. Each crash brings panic, uncertainty, fear, and regret. All of us feel these emotions and it hurts. It’s easy to ignore these in hindsight, but it’s hard to maintain a long-term outlook when your own portfolio declines by 10% in a single day. It’s even more painful for new investors who haven’t seen a crash yet. The first instinct is to react. To put stop-loss or price averaging falling stocks or even panic selling. Instead of reacting, just holding the stocks is the sure-shot way to earn that 20x return.

This is the price of successful investing, which means enduring volatility, uncertainty, fear, and short-term notional losses without reacting impulsively. Its a price that must be paid, just like annual fees on your Demat account.

But why do short-term investment losses hurt more than paying money to buy a car?

It’s because we think of it as a fine for doing something wrong rather than simply a fee that must be paid. The price of market returns is not obvious. It's hidden inside market volatility. There is no clear price tag, like a car has.

The trick is to think about this price as a fee rather than a fine. This way, you build a mindset that paying the fee is necessary to stick around long enough in the market and gain from compounding. You have to realise that the fee is worth it. This is the only way to deal with volatility.