Scientific investing protects, creates wealth beyond the bull market rush
We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.”
—Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds
The recent 1+ year bull market and IPO frenzy have delivered high returns. Many people might have triple-digit returns from the bottom of the market, which is not surprising given that Nifty 50, Sensex, S&P 500 and Nasdaq all have delivered close to 100% returns from 20 March 2020.
No one can argue with the high returns an investor has made. However, if this is not backed by a true investment philosophy, the returns are likely to prove illusory and eventually that money is likely to be lost over the full market cycle.
Millions of investors—not only first-timers, but also professionals or experienced ones—have learnt, wrongly, that there is an easy way to make money. In the middle of a bull market is the perfect moment to understand and remind ourselves of the correct way to make money from equity markets and caution ourselves of the wrong ways and their illusory returns which cannot sustain for the full cycle but are likely to drain from the portfolio when the bear comes eventually.
Let us revisit the science of investing and the first principles governing it. At the heart of investing is the concept of intrinsic value. Any asset should have clearly visible cash flows in the future. And these cash flows should not be from other “investors”. These should be from users of that asset to satisfy their needs or demands.
At the most basic level, an investor invests in or buys an asset to get the cash flows from them. If an investor is happy with the expected cash flows, he or she can invest even in an unlisted asset.
If the asset is listed and there is a market price, the market price is one more way for the investor to get their returns. If the market price is significantly higher than the intrinsic value, it is beneficial to sell the asset in the market and lock-in the returns which are higher than the estimated cash flows.
What confuses many investors is the quick upward movements which happen during bull markets. Many “investors” learn wrong lessons either from their own experience or seeing others making huge short-term gains.
