Most questions in life are not easy to answer – but this one is. On the face of it, anyway. To double your money, you need three things: 1. Time 2. A return on investment, and 3. A very critical factor, which is often overlooked, that we will discuss below.
Rule of 72: The famous rule of 72 says that if you divide 72 by the rate of return, you get the number of years that it will take to double your money. For example, we have seen a past return on our Veda funds of 23% per year. Our average investment doubled in 3 years (72/23).
Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years – Buffett
Over time, stock markets have yielded the highest returns out of all major investment categories returning an average of 6%-8% per year. By the rule of 72, that means that investments would have doubled in about 10 years. But short term, markets don’t always go up – they can go down – on average about 1 year out of 4. But the great thing is that years following a sharp drop off in the markets is generally followed by a dramatic bounce back in a following year. The markets are ultimately fueled by fear and greed. Fear triggers selling which reduces prices. This induces a cycle of greed with opportunistic investors picking up bargains, and so the cycle continues. In any case, as investors we don’t need to concern ourselves with the short term gyrations of the market. We simply invest in high quality companies at an attractive price and wait for the stock price to reflect its intrinsic value.
The key to making money is to stay invested
And finally – I promised to share some thoughts on the final, very important factor – and that is Staying power. It is critical to remain invested. In 2008, as markets dropped drastically, people panicked and got out of stocks. And then the markets bounced back and made huge gains. But many stayed away and did not participate in the upswing. If a $100 investment falls to $50, it has to go back up by 100% ie $50 to get back to breakeven. The irony is that as the markets regained lost ground in 2009-2010, the fear led to many being excluded from the large gains, and it took years for their portfolios to get back to where they were.
So great, what is the secret recipe?
There is a recipe, and the good news is that it is no secret. It is Value investing. The greats like Benjamin Graham, Warren Buffett and others have shown that value investing, has consistently beaten out other forms of investing/ trading. The principle is simple. Buy a great company at a discount to its intrinsic value. Find mispriced assets, invest in them, and then wait patiently for the markets to discover the true value of the stock. There is no need to guess about the direction of the markets, which, anyway, no one can. The secret is to buy great companies with well differentiated businesses, at a cheap price, and to sell them as they reach intrinsic value and when the capital can earn higher returns in a different opportunity.