Imagine you’re at a social event, talking to some established names in the investing community. One particular gentleman tells you, “Yes, I invested in Zomato back in 2015, and exited at 9x in the IPO”. Another gentleman tells you something similar, “Yeah! I invested in Ola back in 2015 too, and exited at 12x in their latest round”. You, being the seasoned investor, wonder to yourself, “Wow. How are these people making such exorbitant returns, while my own portfolio has only grown 3x in the same period?”
Doesn’t feel good, does it?
What those investors didn’t tell you, is that for every Ola and Zomato they invested in, they have invested in a bunch of other small startups, that didn’t make it. Companies that could not utilise their cash correctly, and just kept burning money. If you look at their cumulative investments, their portfolios may not be outperforming yours.
The difference? They look at risk differently. Their appetite for risk is much higher than yours. Returns could be the same, but they’re okay with losing money on one investment and probably making it from another.
Hence, as an investor, the focus should always be on the risk. Simply put – if everything goes wrong, how much am I likely to lose? That is your risk. The returns you generate are a combination of a lot of factors, such as
- Overall market sentiment: Bull market / bear market
- Investments in the sector: e.g – AI based companies are getting funded everywhere
- Macro factors: How attractive the country is
- Luck: Yes. Luck too plays a part
So, the next time you’re at an event like that, ask those gentlemen their overall returns over the period. More often than not, your simple long-term portfolio is probably outperforming theirs. And even if it isn’t, they probably had more sleepless nights worrying about their portfolio, as compared to you!