If you understand what is risk; returns will take care of themselves. But unfortunately, most of us believe RISK = VOLATILITY. Nothing can be further from the truth. However, due to this misunderstanding, most investors either stay away from the stock markets or invest with a short term mindset. Let’s understand risk as defined by two greatest investors:
Warren Buffett said, “Risk is not knowing what you are doing.” I see many people dabbling in derivatives without understanding even 10% of it. This is suicidal.
Charlie Munger has a very interesting perspective on risk, he says, “Risk is
1. Permanent loss of capital and
2. Earning inadequate returns over time.”
You must have realised by now, equities are not risky over long term as markets are slaves of earnings. Historically too only asset class to beat inflation and produce superior real returns consistently is Equities.
We all don’t have expertise, time and passion to invest directly hence equity mutual funds are our only best bet to produce superior returns over long term beating tax and inflation.
To quote Christopher Browne “Peter Lynch, the legendary and highly successful manager of the Fidelity Magellan Fund for many years, once remarked that he calculated that more than half of the investors in his fund lost money. This happened because money would pour in after a couple of good quarters and exit after a couple of not so good quarters.”
Happy Investing !!