Short Term Returns V/s Wealth Creation

What sounds better?

Adding your wealth

(10 + 10 = 20)

Or

Multiplying your wealth

(10 x 10 = 100)

Though it’s difficult to resist the temptation of short term returns, however, if you are considering short-term trading as an alternative strategy, we recommend you do so only with a full appreciation of the challenges and risks that are involved. Equally it is important to understand that engaging in equities for short term returns is meant for you or not? With higher prospects of making quick profits, comes the increased probability of making losses too.

We believe, short term trading for quick returns is meant for:

1. The people who are extremely technical and experienced and have an excellent grasp of technical charts and graphs.
2. The people who have enough time to sit in front of computer during the market hours and watching their positions consistently to take quick decisions with regards to their equity positions.
3. The people who are not bothered about the volatility thrown by Mr. Market time to time and can bear high pressure in these situations.
4. The people who are quite ok with the leverage/margins they are using for creating positions in F&O. While leverage can be used to great effect in boosting your returns but it also comes with a series of disadvantages and is extremely dangerous.

It is not meant for:

1. The people who do not understand the nitty-gritty of short term trading and not willing to suffer losses for the quick returns they are expecting.
2. The people who can’t bear the high pressure thrown by the markets and become susceptible to “Fear and Greed” cycle of the markets.
3. The people who have a day job and can’t continuously monitor the markets sitting in front of computer every day.

Therefore, we believe, accumulating short-term positions in equity markets may be the most difficult way for marking money in the stock market. The gains could be exorbitant and so does the losses. And it is almost impossible to predict and evaluate the reaction of people making emotional decisions about a company on a few data points.

On the other hand, it is much easier -- and more rewarding to buy the high growth companies after intense research and hold them for the long term. This is the easiest way of wealth creation and Equities have the track record of being Real Wealth Creators and have delivered returns which are better than the other asset classes in the long run.

As can be seen clearly, for periods of 1 year or less, the probability of making losses (as per historical data) is quite high – 42% in one month period, 40% in 3 months period, 36% in 6 months period and 32% in 1 year period. What this shows is that even though markets offer opportunities to make quick profits in short term, there are significantly high chances that you will end up with losses too.

Now let’s evaluate some longer periods. The probability of negative returns or losses is almost zero for periods like 5 years, 7 years, 10 years and 12 years! This speaks volumes about benefits of staying invested in markets for long periods.

So are you a short term trader or a long term investor?

Are you more interested in generating short term returns or inclined towards real wealth creation?

Well, we can’t decide that, but we are sure that after reading this article, you would be able to easily define which category you belong to. We don’t have anything against short term trading .In fact; there are people who are able to make money in trading too. We are emphasizing on the fact that you should first evaluate yourself before you take a deep dive into short term trading.