Wealth Creation through investing in Equity, a challenge within?

“We do not need to be wealthy to be an investor… But we can be wealthy if we are investors”

To explain further let us understand, who is an investor and how can we create real wealth?

Investor is one who sacrifices today for a better tomorrow and real wealth is excess of return on investment over inflation.

ROI – INFLATION = WEALTH (ROI = Return on investment) .

We create wealth when our return on investment is more than inflation. Suppose if the prevailing inflation rate in our country is 8% and our return from investment is 12% than we are creating wealth by 4%. Therefore, when it comes to wealth creation, Equity investing plays an important role.

In the last 10 years our Equity market has delivered more than 17% CAGR, but how many of Equity investors were able to generate that? The opportunity was available to each investor, but why only few of them were able to participate in that return? Why ?

Treating Equity Investment as an Event
Equity means – Ownership of business and business means, ongoing, continuation. However, we always take investments as an event not as a journey. We are under the illusion of controlling stock market. Our stock market history says that as we increase our investment horizon, there is less chance of losing money. In 1969 our Sensex began at 100 and now it is trading above 18500, delivering a return of more than 17% CAGR. During the last thirty-three years, our economy had seen much turmoil, like assassination of two prime ministers, drought, world wars, eleven different governments at least three recessionary periods and so many major financial scandals. Still it delivered handsome returns for investors. Unfortunately, we never link equity investment with a long-term goal.

Averse to accept the uncertainty

Be Greedy, when other’s are Fearful, And Be Fearful, when others are Greedy- Sir Warren Buffet. We understand the risk of uncertainty in our every sphere of life. We have seen accident on the roads, but we still walk on road, we have seen rail accidents but still prefer to travel by rail. We understand that all these uncertainties occurred occasionally. When things are uncertain we use the scientific probability. Moreover, when equity market gets corrected or falls, we assume it will go down further and sell in a panic. We lose the opportunities of being greedy.

Wealth Creation through Equity

Decision Paralysis

Now a day, there is so much  information out there in the media and internet, investors don’t know what to do and are facing decision paralysis.  We never try to understand that the sock which we sell due to unfavourable news, for that there is a buyer also. Seller fears of losing while buyer finds opportunity to create good return, because buyer find opportunities to buy at a lower price. Our emotions control our decisions. We take our decision in relation to others.

Choosing Wrong way of investing i.e. direct equity vs. Mutual Fund

Price is what you pay and value is what you get. If you have got expertise about equity market, there is no harm in investing into equity directly but if you dont, please let it be managed by experts. Fund managers of Mutual Fund houses are well competent on equity investing. I have seen people who invest their hard earn money on tips from friends, relatives and through media. They lose their capital and form opinions that equity investing is gambling. Remember we do not lose money in equity but we lose money in market.

Didn’t follow proper Assets allocation

Suppose someone had invested Rs 100000 in both equity X and Y. After a few years X’s value becomes Rs150000 and Y’s value remains Rs 50000. What  people would generally do is they book the profit out of stock X and invest it into stock Y to average the cost. This is wrong. We should always stay with the performing stock and try to release non-performing one. We always try to manage the invested equity fund from equity to debt and debt to equity and miss the opportunity. If we booked the profit at regular interval, in long term how will we avail the benefit of power of compounding? You should stick to your pre planned equity and debt ratio and reallocate that properly at regular interval either yearly or when you are reaching near to your goal.

Time in the market rather than timing the market

Market timing does not matter in the long term. But unfortunately we try to judge a company in a very short span of time. Only time will tell which company is good. Stock prices are slaves of earnings. Our stock markets history clearly shows that it has generated decent return over long time (100 to 18000+). One thing fixed in equity market is that returns are not fixed. We have seen market deliver more than 20% return in a few days in 2010 when UPA 2 Govt regained the power to form Government. Those who were in got the benefit but those who were out did not.

To sum up, equities are the masters of investments. In any economy, the other assets perform only when equity does well. Fortunately, we are living in a developing economy.  We can create wealth if we start investing early, regularly and in right assets class for long time.