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The Joys of Compounding by Gautam Baid

Delayed Gratification

The Key to Success in Life Is Delayed Gratification

 

Most investors are looking for ways to make a quick buck; however, the best investors postpone their gratification to reap more significant returns in the future.To become a good investor, you must learn to manage your emotional ups and downs.

Stock price fluctuations in the short term should not cause you to panic and sell the stock if your thesis and the company's fundamentals remain unchanged.Furthermore, regardless of whether the crowd agrees or disagrees with you, you should not be motivated by it. 

 

Temperament is essential.

 

The concept of delayed gratification also applies in business. The ability to "delay gratification" is a crucial characteristic of good management. Today's successful companies have leadership that is concerned with the long-term prospects of the business rather than the short-term metrics.

 

Most companies' management is under pressure to report good quarterly numbers to meet Wall Street's expectations. As a result, high-profit margins, rapid growth in reported EPS, all of these near-term figures are boosted. On the other hand, some businesses focus on increasing shareholder value.For instance, consider Amazon. It took Amazon 14 years after their initial public offering in 1997 to turn a profit.This would not have been possible if management had chosen to give in to Wall Street pressure and boost their numbers to meet analysts' expectations in the short term. Instead, Jeff Bezos is dead set on making Amazon the most customer-centric company on the planet. Indeed, deferring gratification yields profitable returns; Amazon's early losses are a speck of dust in the grand scheme of things.

 

Most businesses cannot afford to take a hit to their short-term earnings. 

 

As an investor, you should consider the following questions:

•Are you investing in a company that can suffer and endure "short-term pain for long-term gain"?

•Is the company able to reinvest to maintain a long-term competitive advantage?

•What is the ROIC (return on invested capital)?

 

Anshul Khare once said, "In the early years...compounding tests your patience, and in later years, your bewilderment."

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