The smartest way to invest in the stock market

A compounded 1% improvement every day can be shown as: 1.01^365 = 37.78.

This means that if you improve 1% per day, you become 37 times better after one year. As opposed to 4.65 times on simple interest basis.

Now it’s a world of difference!

I am sure you must have heard of Chinese bamboo.

After being dormant for four to five years, the Chinese bamboo tree grows 80 feet (about 30 meters) in just six weeks.

The question is, did the tree lay dormant for four years, only to grow rapidly in the fifth?

Or was the small tree growing underground? Was it developing firm roots and a steady support for its exponential growth in the fifth year and onwards?

Small strides in investing are greatly underestimated.

And the ability to do nothing after investing is probably the most underrated quality of an investor.

Investing gurus talk about buying the right stocks. let’s talk somethingsell stock at the right time, But hardly anyone talks about holding stocks for years and decades.

This is the reason that . these words ofCharlie MungerAn investment to me is like the words of the Bible…

The big money is not in buying and selling, but in waiting.

But along with the numbers, the truth behind this forecast becomes extremely difficult. Consider this chart of Titan.

Let’s say you bought Titanat stock in June 2017 at the peak of the market cycle. Over the next two years, as of June 2019, the stock would have gained 151%.

Again, let’s say you bought a year later in 2020 following a market drop and held off for a year, only to sell it in March 2021. Titan’s stock would have had a very good 78% return again.

Finally, let’s say you bought and held stock for only nine months, from April 2021 to January 2022. The resulting 80% profit would be commendable.

You must have done well on all three occasions. But the real kicker is the 392% gain on the stock in three years.

Around 5x profit would make the stock eligible to be called a multibagger.

But the profits do not end here. Take a look at the taxes paid on profits.

By the end of the fifth year, if you sell the stock, about 20% of the total profit will have to be paid to the government as taxes.

Saving tax every year, year after year, is akin to an interest-free loan from the government.

By that logic, aren’t you better off keeping interest free loans for yourself for years? Why would you want to hand over taxes on short term sales day after day?

Imagine long-term investors in Titan who have amassed immense compound wealth over the decades.

He not only saw a jump in his portfolio. They have consistently enjoyed mouth-watering dividends over the years.

And they also reinvested the taxes on the notional profit year after year at zero cost.

There cannot be a better way to allocate capital to shareslong term investment, Like Munger says, big money awaits.

Happy investment!

Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.

This article is syndicated from equitymaster.com

post your comment
first article