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Why does conviction matter when investing?

When markets tend to go through their occasional drops, the people who come out on top are often those who kept on investing as if nothing has happened. They had the wisdom to realize that they can’t predict when markets will go up nor when they will go down.

We often say that equity investment requires conviction. If last year and what has happened this year are anything to go by, then the importance of conviction in your investment strategy can’t be understated.

Market timing is not as great as sticking to the markets

When markets tend to go through their occasional drops, the people who come out on top are often those who kept on investing as if nothing has happened. They had the wisdom to realize that they can’t predict when markets will go up nor when they will go down. The only thing they had power over was whether to continue investing or not.

While traders and pundits will often go on about how market falls are a good time to buy undervalued stocks, as is happening in the case of small cap company stocks, wise investors stick to the basics. Their basics tell them as long as they invest in good companies and believe in the inherent case for the economy, they have little to worry about considering the timelines they are looking at.

They do not concern themselves overly with questions of market timing. Consistent investing ensures they get better value for money when a market is headed down.  It is the quality of what they buy that matters and not when they do so.

Where does conviction come into the picture?

The world of today is hyperconnected. Information, correct or otherwise, is shared almost as fast as events take place. Wise investors are not in the habit of jumping on the first piece of information they get. Their strategies are often the product of thought that has considered multiple scenarios. They often have the conviction to wait and let events play out rather than jump the gun. While quick when opportunities present themselves, they see facts objectively.

Even if an opportunity seems to be too good to be true their focus on a margin of safety ensures their eggs are spread across many safe baskets. Not giving in to the temptation of easy wins requires conviction and belief in your own time-tested theories of what constitutes wise investing.

Your conviction will be tested 

With the recent standoff on the borders and elections around the corner, the markets are in for a wild ride. It will see many winners as well as losers in the short run. But if one were a betting person, the odds will invariably favor the ones who keep the long-term picture in mind.

If history is anything to go by, those investors who broadly ignored market volatility and stayed invested, would have seen their money grow 34 times from 1991. 

If an investor had panicked and sold out and failed to participate in the strong years (i.e., if the investor had not participated in years where gains were > 25%), instead of making 34x over the 27 year period, the investor would have barely doubled the money in the same period (which translates to 1.0% pa or Rs 100, instead of becoming Rs 3,400, would have grown to just Rs 132).

Elections will come and go, governments might or might not change, but the economy invariably always heads upwards.

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