HISTORY is…. well history! An important lesson from history -- you cannot learn from it! As Wall Street stock investor, Peter Lynch puts it 'You cannot look in the rear view mirror and drive.'

And mutual funds are living proof of the fact that history is, in fact, redundant. Do you remember this line: 'PAST performance is not an indicator of the future'? Yes, this glares out at you from the literature of every mutual fund you own.

In fact once, when I was lecturing at a mutual fund house, which was not performing well, one of the managers said, jocularly, "Can we say our past non-performance is not an indicator that in future we will not perform?"

Also read: PV Subramanyam's blog

He's right. You can't. So how do you look at equity? Here are a few pointers:

a. Understand that the past is only a proxy for the future. When you look at a fund performance, it will only serve as a guide for past history, portfolio selection, consistency of performance and so on. Not as a replication of numbers. So if you chase performance on the basis of its immediate past, you are likely to be sorry.

b. The worst mistake you can make is to average out the returns and interpret them. The volatility of stocks is legendary. Markets returned a figure as high as 266% in 1992 and followed it up with a 46% fall in 1993. Thus the word average return does not make any sense for a volatile asset class like equity. Talking about average in equities is like saying: Yesterday the air conditioner was not working, today it is freezing. So, on an average we are comfortable!

c. The buzzword is LONG-TERM: There is enough literature to show that equities are an excellent long-term instrument, and very volatile in the short term. But the wide disparity of returns makes holding stocks for long periods of time a better idea than holding them for short periods. In the Indian context if you had invested in the index, in say, 1978-79, and reshuffled it regularly your portfolio of Rs 100 would today be worth Rs 16,000

What's also clear is that the probability of making losses is almost nil if an investor stays invested for at least 10 years. Of course, it goes without saying that he invests in fund that is managed by a good manager (fund house). Well-diversified funds, index funds, unit linked equity funds (which by definition have a long term horizon) should all be in your wish list.

d. The returns in equity might not be what they were over the past five years, but other options don't even come close. Other asset classes like say debt funds protect your capital and give reasonably good returns. But they are not protected against inflation.

But finally, in-spite of reading all this, making money from equities eventually boils down to your stomach. The most important part of investing is managing your emotions. As Lynch says: The amount of money you make is not a function of your IQ, but a function of the strength that your stomach muscles have!

Do you have the guts?

Also read:
Get rich. Do NOTHING!
Stock markets are like supermarkets
Before you buy that new fund

Photograph: Lisa Maree Williams/Getty Images

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