Yours is a good question, and indicates the seriousness about investment - something that is hard to find by nowadays
Now to answer your q:
if you’ve understood the concept of CAGR, in simple terms it helps you compare stock performances. If stock A generated 112% returns in 6.5 yeas, and stock B generated 356% returns in 10 years, How do you compare which one performed better? The answer is CAGR.
Like % of marks, its a single number which allows you to compare investments in different securities over different time periods.
Also understand LONG TERM means uncertain period - can be 5 years, 8 years, 20 years or whatever
If I have invested in PNB for LONG TERM, I’ll look at PNB’s historical data, and calculate its CAGR in periods of different times.
Say I’ve been holding PNB since last 5 years and now I need to decide whether I should book profit or not. I calculate CAGR on historical data for every 5 year period (2001-2005, 2002-2006, 2003-2007, and so on). That list of calculated CAGR figures gives me an approx. value of how CAGR has performed over the LONG TERM for the time period till I’ve been holding the stock. In this case, over a 17 years period (2001-2017), I’m checking it for every 5 years - that is my already invested period.
If my presently invested CAGR is better/similar to that average CAGR figure, I’ll book profits. Using that money, I’ll immediately buy another beaten down stock.
Why it helps to book profits? People often quote example of biggies like MRF, Infosys, etc. that have been consistent risers over long term. But the question is - can you spot the next riser?
If you see history of IFCI, that has been down from Rs. 112+ levels to Rs. 23 between 2007-now. Unless you book profits regularly, you wont be assured of returns.
Summary - Backtest on historical data. Don’t sit like a blind follower, because you never know which PNB, which Satyam, which Global Trust Bank will ruin your money.