Growth in stocks is not linear

by Manshu on December 14, 2007

in Opinion

One interesting thing that I have learned in the last few days with the market boom is that growth of stocks is not linear like bonds or FDs. What that means is that while your fixed deposits will grow at a certain rate always and say will increase by 10% in six months and then another 10% in six months your stocks grow in a way which is not linear at all. Your stocks may remain stagnant for 11 months or even give negative return and then in the last month may grow by 30%. 

 

I’ve wanted to write this post for a long time but I wanted to collect some data and present it before writing it. I figure if I wait to collect that data first then will never get around to writing this post. Anyone who wants to validate this though can go to www.nseindia.com and look up any stock and then see in which months it has risen by how much percentage and they will have their answer. 

 

The point here is that many a times investors lose patience thinking that it’s been over a year since they bought the stock and there have been no returns on it and maybe it’s a wrong decision etc. However if nothing has changed fundamentally then just this is not a good enough reason to sell your stock. There is absolutely no limit to how much a stock can grow in just a few days and which it does also but most of the times after you have already sold your shares. 

 

This concept is very easy to understand however it is somehow not very easy to avoid the pitfalls that thinking along these lines brings to investors. That pitfall is holding a share for ages and then selling it just before it rises for the only reason that the stock didn’t rise in all these days. 

 

The key is to have patience and not sell only for the reason – that it is not rising. 

 

Manshu Verma 

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