The Harsh Reality of Compounding

Today’s Market Update

The week began on a very confusing note. The first news that came out from the US administration said that H1B visas would be hit with a $100,000 fee per year, and people outside the US needed to return by 22nd midnight.

Thankfully, by Sunday evening, there was confirmation that this does not impact old H1B visas. The change would only apply to new H1B visas in the next lottery starting in 2026. The fee will be charged to the companies applying for H1B visas, not directly to employees, so as long as firms support their staff, individuals are safe.

Then came another report saying the US administration was considering taxing American companies that offshore work. While this is not yet official, the idea is that if companies shift from onsite to offshore, the government might impose an offshore tax.

• Despite all this noise, there was no big collapse today. Nifty fell only 0.5%, showing strong resilience.

• Nifty Junior even gained 0.32%. Midcaps were down 0.56% and Smallcaps by 0.9%, taking the bigger hit but still within the four-month trading range.

• Bank Nifty also slipped just 0.31%. Clearly, the market absorbed the weekend confusion without panic.

• The big story though is gold. In INR terms, gold rose 1.29% today, touching ₹11,200 per gram. Just a month back in August, it was at ₹9,800.

Other Market Triggers

• Pharma fell as concerns grew whether the US might target that sector next. FMCG also struggled.

• Reliance and SBI slipped, Tata Motors was down despite car-related benefits, and several names like Dabur, LTIM, and Swiggy also corrected.

• On the other hand, Adani stocks surged after a clean chit, with Adani Total Gas jumping nearly 20%. Adani Power stood out, jumping 12.36% after the clean chit, which was a big surprise even though the stock had been gradually gaining earlier.

What to watch next ?

• The recent news also points to a larger shift in the global order. For decades globalization has been the rule, but now we are entering a multipolar world where nations want to reduce reliance on one country, one client, or one vendor.

• Just as investors diversify their portfolios, companies and countries too are thinking about how to spread their risks. Ten years from now, history books will likely mark 2023, 2024, and 2025 as years of seismic changes.

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What To Read This Week ?

The Reality of Compounding: Beyond the Fantasy Charts

The journey of compounding a portfolio is often different from what we expect. While we may see charts depicting a smooth, upward trajectory, the reality is far from it. For a US example, a portfolio compounding at an 8% average return might not show significant exponential growth until after 10 to 15 years. This is when the "hockey curve" truly begins to kick in.

The Myth of Uniform Returns

One of the biggest misconceptions about compounding is the assumption of uniform returns. In reality, market returns are lumpy. 

A typical five-year period might consist of one great year, one bad year, and two or three years of minimal returns. This lumpiness makes the investment journey more challenging, especially for those who are new to the market.

The Allure of Lumpy Years

Many new investors are drawn to the market after a year of exceptional returns. However, it's highly improbable that another such year will follow immediately. While you might get lucky and experience two back-to-back years of outsized returns, this is not the norm. Therefore, expecting a smooth, consistent growth curve is a fantasy. In real life, the path to wealth accumulation is volatile and unpredictable.

The Importance of a Self-Correcting Strategy

Despite the unpredictable nature of the market, the underlying principle remains: if you stick with a self-correcting and self-healing strategy, you will likely achieve your financial goals. The path may be bumpy and full of twists and turns, but the destination is attainable.

Key Takeaways:

• Patience is Key: True compounding takes time, with significant growth often occurring after 10-15 years.

• Embrace Volatility: Don't be discouraged by market lumpiness. It's a normal part of the investment journey.

• Avoid Chasing Returns: Entering the market after a huge year of returns can lead to disappointment.

• Stick to a Strategy: A self-correcting strategy is crucial for long-term success, regardless of short-term market fluctuations.

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