Equity investing is easily one of the most controversial topics (may be after the performance of our prime minister!) with views sharply divided between 'believers' and 'non-believers'. When most successful investors (also market experts) talk about equities being a fountain of wealth creation, the average investor is left wondering whether these guys are from the same planet or aliens who just landed from another galaxy! In contrast, if we ask the 'successful investors' why the general public is so much averse to stocks, they might tell us something like this: 'They will never get an account statement detailing money they never made by not investing in stocks'. So who is right? The successful investors or general public?
Actually both! Because that is how their experiences are stacked. Equities are the most sophisticated form of investments where returns differ from investor to investor. While the smart few reap big rewards, general public often bears the brunt of inadequate skill and knowledge. Note that the skill and knowledge gap is much much lesser in any other kind of investment: whether it be fixed income, gold or real estate. To top it, equity markets are volatile and force the average investor to buy during market euphoria while selling during a period of market carnage. In fact, statistics reveal that returns made by an average investor in an equity mutual fund are much lower than the returns actually delivered by the mutual fund! How is that possible? Because the average investor is putting money in the fund around market highs and withdrawing close to the market lows!
So what can the average investor do? Only one thing will work: Try to become above average! The nature of equity markets is never going to change. There will always be few winners and many losers in the market. Thats the nature of the game.... But the opportunity is to be a smart investor by increasing one's knowledge and skills and reap the rewards available on the other side.
How to do that? 1) Develop enough expertise so as to be able to distinguish good stock investments from bad ones, 2) Have a diversified portfolio of stocks with companies having a great opportunity for profitable growth and a strong management, and 3) Allocation based approach that focusses on the individual rather than the market.
At Inertia, we offer all of this!