When it comes to long-term returns, setting realistic expectations is crucial, said DSP Mutual Fund in a report. It suggested that historical data indicates that global equity markets have achieved ~5% CAGR (Compound Annual Growth Rate) over the past 123 years, before considering costs and taxes. Indian markets had grown a CAGR of 6.6% in the period while US markets grew by 6.4% and China by 3.3%.
DSP Mutual Fund in its 2nd edition of its monthly report Netra added that should the investment have been through a simple SIP in US equities, it might have yielded an approximate ~10% inflation-adjusted CAGR over the same 123-year period. This means, a modest $100 investment could’ve turned into $11.8 million today. This proves that Dollar Cost Averaging indeed works to preserve purchasing power over time.
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Netra highlighted the importance of concentrating on long-term investments and not succumbing to speculation.
It added that Warren Buffett and Charlie Munger sidestepped the Dot Com frenzy and underperformed the Nasdaq Index by 155 per cent over 1998 and 1999, the peak of the tech bubble. However, over the full cycle from 1992 to 2008, Berkshire Hathaway earned a 14 per cent CAGR vs the Nasdaq which earned an eight per cent CAGR over the same period.
The report also showed how Warren Buffett’s investment in American Express during the Salad Oil Scandal exemplifies the principle of seizing opportunities amidst temporary setbacks.
Despite the company’s stock plummeting from $65 to $37 due to losses incurred by funding De Angelis’ Allied Crude, Buffett recognised the downturn as temporary and purchased a 5% stake for $20 million.
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By capitalising on market inefficiencies and acknowledging the long-term potential of high-quality businesses during challenging times, astute investors can position themselves for significant returns, the report highlighted.
Netra also referenced how Late. Rakesh Jhunjhunwala, popularly known as “The Big Bull,” amassed tremendous wealth by strategically holding onto select high-quality businesses over extended periods. Jhunjhunwala’s famous quote, “Funda Ka Ho Gaya Mental,” serves as a real-life testament to the futility of second-guessing market moves. Instead, he advocates staying invested throughout market cycles by adhering to two fundamental principles:
1. Avoiding overpayment: By not paying excessive prices for investments.
2. Acquiring high-quality businesses: Focusing on companies with the resilience to withstand market fluctuations.
This approach has played a pivotal role in Jhunjhunwala’s success, showcasing the power of strategic investing in generating substantial wealth over time, the report underlined.
“We live in times when the average lifespan of human beings is continuously increasing, and the mortality rate is falling. However, the scenario is quite the opposite when we look at firms. Many businesses struggle to survive in this changing landscape. Companies either wind down or they get ‘disrupted’, and this is happening at a much faster pace. It’s tough to find individuals and organisations committed to the long haul. Should you find them, stick with them because they hold the secret to long-term success, and possibly, financial abundance,” said Sahil Kapoor, market strategist and head of products, DSP Mutual Fund.
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