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Importance of having consistent ROR

I am sure that you have heard about the race between rabbit and tortoise. Tortoise, being slow but steady, won the race. The main lesson learnt from the story is about the importance of consistency. The same applies here in stock investment.

Considering two investors, A and B. Investor A is a true investor. He follows the concept of value investing, whereby he buy a good stock and hold it for long term. This stock that he bought in does not fluctuate much in terms of share price. It is a steady stock that gives out fair dividend annually. His rate of return is around 8% per year. 
Investor B likes to speculate more. He likes to buy and sell in a short period of time by listening to rumours and insider news. Sometimes, he gains a lot of profit. Sometimes, he losses money. Assume that he earns an ROR of 15% and -2% alternatively, let's see the investment worth of both investors in 20 years time. The initial capital they have is the same, RM100,000.




As we can see, although initially a high ROR spurred the investment worth. Nevertheless, earning consistently is more important than having a random ROR every year. Starting year 5, the investment worth of investor A has surpassed investor B (speculation). Unless there is some exceptionally high ROR for investor B, it will be hard, or impossible for investor B to catch up. This is because every time you lose 15% of your investment asset, you will need a much higher ROR (higher than 15%) to earn back what you lose. 

Year 1: ROR = -15%. RM20000 x 85% = RM17000

Year 2: ROR = 15%. RM17000 x 115% = RM19550

See, it is always easier to lose money than to earn money in stock market. In fact, in order to get back to RM20000, Year 2 ROR has to be 17.6%. So, make your stand, invest or speculate? Slow and steady or fast but inconsistent?

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