Why does the market perform better than your portfolio?

The BSE Sensex has delivered compounded annual returns of 19% over the past 10 years. This means that if an investor had invested Rs 100 in the index way back in November 2001, it would be worth approximately Rs 2,456 today. But not many investors have enjoyed such phenomenal returns. A leading daily conducted a study recently to try and give reasons for this. Why don't most retail investors realize the returns that are similar or equal to that of the broader markets?

A big reason for this is the 'excesses'. This is excess fear as well as excess greed. Most investors tend to panic when things start getting tough and sell their holdings. As a result, they even end up selling those stocks that are actually just reacting to negative sentiments, but otherwise are sound investment opportunities. On the other side of the table, when the same investors see gains in a particular investment, they continue to hold it even though the fundamentals no longer justify the valuations. As a result, of this excessive greed they are hit hard when the stock comes crashing down. And unfortunately such declines wipe out all the gains that the investment would have otherwise made.

The second big problem that makes high returns elusive to a retail investor is the 'herd mentality'. Most investors follow the herd. If everyone is buying a stock, they would go ahead and buy and vice versa. Very few actually dig deeper to find out why is it that they are buying the stock. Are the fundamentals good? Are the numbers interesting? Is the management sound? Is it available cheap? What are the growth prospects? Hardly anyone sits down to ponder the answers to such questions before investing in the stocks. They just buy what everyone is buying. And like any herd, when there is a stampede, there is a bloodbath. And the investors suffer losses.

So how is it that investors could avoid falling in one or both of these traps? The answer is simple. It is important to look at investments like owners. This means that you do your due diligence and invest in those companies that are fundamentally strong and available at cheap valuations. And then hold on to these stocks for long horizon. And at the end of it you will not just end up earning the returns that the broader markets offer, but also end up beating them.