Usain Bolt’s record in the 100-metre sprint stands at 9.58 seconds. Eliud Kipchoge’s record at the marathon is a timing of 2:01:39.
If we were to argue hypothetically, had Usain Bolt sustained his record-winning speed over the distance of the marathon, he could have completed the marathon in a time of 1:07:22 (half the time of the current world record)! How does that sound?
Doesn’t it sound outlandish even to contemplate? Of course, it does. A marathon is an event not of super speed, but of sustainability and endurance over a very long distance. The two gentlemen are great athletes, but neither of them can be called superior to the other.
The fact that Usain Bolt runs faster does not really mean he is a superior athlete compared with Eliud Kipchoge, notwithstanding the difference in speed or difference in distance covered.
And, as we all know, the average speed (the measure of performance) comes down when the distance to be covered is longer and longer. So far, so good.
Now, let us superimpose the same thought on investing. All investing is done with some goal in mind. We invest for our children’s higher education, to fully or partly fund the purchase of a major asset, to meet financial needs relating to a wedding, to fund retirement, or to meet financial obligations caused by some unforeseen event.
Every financial goal should have a different asset class mix, and this mix should be consistent with the goal in mind. If one is investing to build a capital for his or her retirement, or some other long-term goal like that, what good does it do to extrapolate a fantastic one-year return (earned in a wildly bull market) and expect that over 10 years? Can we generate the same fantastic compounded return? Does this sound any better than the Bolt- Kipchoge example?
At the same time, a negative return in one year (when the market is bearish) should also not be extrapolated over long term, and we as investors should not come to any wrong conclusion that the stock market would perennially be negative.
A good starting point is to establish what is a sustainable rate of return and build an investment plan around that. The stock market’s long-term growth record in India over the last 40 years has been about 15.8 per cent per annum. It has roughly grown in the same proportion as the nominal GDP growth of the country.
Going forward, we have reasons to believe that the nominal GDP growth over the next decade or so can be about 12-13 per cent per annum. These figures should temper our expectations about what sort of returns the overall stock market can deliver over time.
Better investing skills, including choice of stronger and more efficient companies, and at prices that make sense, can deliver a better (but not a spectacularly better) return compared with the broader market. A realistic return expectation from equities can help in not straying from our path too much.
It would also prevent us from trying to replace Usain Bolt with another sprinter the moment there is a slowdown…