Posted on 19 September 2015 with no comments from readers
Mark Spitznagel won’t confirm or deny the rumors that he made a billion dollars on Black Monday last month through effective hedging. He talks to Fox Business anchor Maria Bartiromo and says this is just the beginning for volatility to come.
He thus is not concerned about any short term movements in the market.
Every trader will trade in the market with a different set of mind and they will react differently to the same situation.
Understanding the compounding effect in the market is important. compounding is when the money grows and where the gains from the last years gets reinvested for the next year.
So suppose that you had invested 100 in a particular year at a rate of interest of say 20%. Then at the end of the year you will have 120 in your account. You have two options at the end of the year. You may either reinvest the 120 back or take out the 20 profit that you earned this year.
You decide that you do not want to withdraw the money but instead plan to reinvest it. When you calculate the amount at the end of the 2nd year it has grown to 144. This 144 grows to 173 at the end of the third year and this keeps going on and on. If you had withdrawn the 20 at the end of the first year then you would have earned just 60 profit at the end of the third year.
But because you had decided to not withdraw your money but to stay invested you gained 13 or 21.7% over the 60 that you may have made had you withdrawn your profits. This is the compounding effect.
As per the compounding effect the longer you stay invested the faster you will see your money grow. When you invest in the market based on fundamental analysis you will be advised to stay invested for a longer term. So before you start to invest in the market understand your mindset.
The question that comes to mind is that whether investing actually works. Investing can be compared to growing a plant where if you give the plant the right amount of care then it is sure to grow. All this is published here in great detail.
How do you allocate capital is such an environment? Something like cash in the short run…