2023-05-07 14:44:34
Weekly Groww Digest
7 May 2023
Sensex: 61,054.29 ▼ 0.10%
Nifty: 18,069.00 ▲ 0.02%
‘Magic of compounding’ – sounds so boring.
Why?
Everyone in the finance industry repeats it – repeatedly.
To make things even more repetitive, in our age of social media, it gets repeated that much more often.
It almost goes from being boring to annoying.
Peter Lynch is famous for saying, “everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it”.
He is also famous for advocating that investors invest only in companies that they understand.
Besides this, Peter is famous for authoring books that many investors treat like religious books.
‘One Up on Wall Street’ and ‘Beating the Street’ are two of his most famous books.
But all of this is a product of his main work: he was the fund manager of the Fidelity Magellan Fund.
Fidelity launched a new mutual fund in 1963 – Fidelity Magellan Fund.
From 1963 to 1977 (14 years), it had a total of around $20 million of investors’ money in it. By most measures, this is a small amount for a mutual fund.
Between 1977 and 1990 (13 years), this amount grew from $20 million to around $15 billion.
Why? Peter Lynch.
In 1977, Peter Lynch became the fund manager of this fund.
Peter Lynch is considered one of the top 10 fund managers in history.
Between 1977 and 1990, Fidelity Magellan Fund gave returns in excess of 29% per annum.
It was the best performing mutual fund of its era.
In 1990, Peter Lynch quit his job at only 46 years old to spend more time with his family.
29% for 13 years.
Anyone who has been an investor – in mutual funds, stocks, derivatives, anything – will tell you how impossibly great those returns are.
If you invested Rs 1 lakh into this fund in 1977, you would have almost Rs 28 lakh 13 years later.
To give you some context, you will struggle to find an Indian mutual fund with over 29% returns over a 10 year period, let alone 13 years.
The mutual fund returns in the US are even lower.
The Fidelity Magellan Fund had grown so famous for its performance, everybody wanted to invest in it.
The amount of money invested in it shadowed the money managed by its competitors.
In his 13 years as the fund manager, Peter Lynch would have made his investors very rich.
But he did not.
There are numerous reports from back then and even in recent years that say the same thing: the mutual fund made great returns. But its average investors did not.
How is this possible?
This isn’t Peter Lynch’s fault. It isn’t even Fidelity’s fault – the numbers are all correct.
It is the investors’ fault.
29% per annum over 13 years doesn’t mean the mutual fund gave exactly 29% returns every single year.
It means the average returns over that 13 year period was 29% per annum.
In some years, the returns were higher than 29%, and in some years, below 29%. And sometimes, they were even in the negative.
Too many investors got scared of such times. They would take out their money in such moments.
And then when the returns would have climbed high, they would start investing again.
The cycle repeated many times over the 13 years.
The result of this was that investors never really remained invested for long periods of time.
The same can be observed in India also – investors tend to not get the returns that mutual funds show because they withdraw and reinvest too often.
Among many lines, Peter Lynch is famous for this line too: ‘the real key to making money in stocks is to not get scared out of them.’
Compounding stops working the moment you take out money from the investment.
This is true for all good long-term investments: mutual funds, stocks, FD, gold – anything really.
The key here is of course ‘good’. If you remain invested for long-term in a bad investment, it’s not going to help in any way.
Finance experts and influencers keep talking of the ‘magic of compounding’.
That sounds boring. It is – compounding is boring.
But does it work?
Yes, it does – only when investors let it work.
12.6K views11:44
G
