Is there a sure short mantra that one can apply to investing? After all, the core purpose of investing is to create wealth for the future. But there is nothing like any one single way or one simple way. As Euclid put it very succinctly, “Excellency, there is no royal road to Geometry”. Similarly, there is no royal road to investing. An investment journey has to necessarily combine home work, diligence, patience, discipline, conviction and pragmatism. It is only when you combine these 6 attributes that you can actually create wealth through investments. Before we get into specific cases and approaches to how this is done, let us look at what these 6 attributes actually mean?
Home work is the research and preparation that has to go into any investment decision. It has to be a good investment. The bottom line is that you must be willing to reject 100 bad investments before arriving at a good investment. Diligence is all about the investing process. You should define and execute each of the process to perfection. From the stop losses to the risk management and to the order types, you need to do good execution. Thirdly, you need patience. Whether you are investing in a stock through demat account or in an equity mutual fund, you need to stay in the investment long enough to reap the benefits. Fourthly, discipline is a must. When you have a 5 year perspective on a stock then don’t get distracted by noise. Above all, it will also boil down to your own conviction and that is the key to success. It is like how investors like Buffett have persisted with stocks like GEICO, AMEX, and Coca Cola etc. Lastly, you need to be pragmatic. Even the likes of Buffett gave up on IBM when it was not working and as sold on to technology despite apprehensions.
(1) How Manish Shah leveraged equity SIPs to create wealth
From the very beginning, Manish was clear about his preference for diversified funds. According to Manish, it was not worth taking the risk of direct equities, so he preferred the phased SIP approach to creating wealth. His view was that the large caps and the mid caps should vastly outperform the indices provided good stocks were selected. Since he was an engineer and not skilled at stock picking, he decided to leave it to a professional fund manager. It is with this perspective that Manish investing Rs.2,500 per month in HDFC Equity Fund (G) option. Manish was not a finance man but he knew that if the fund paid dividends then he would use it for other needs. He therefore decided to opt for the growth plan. He actually started off in 1998 after the world had imposed sanctions on India in the aftermath of the Pokhran tests. He never thought of increasing that allocation although his income kept increasing. But the good thing was that he kept up the discipline. This is what happened.
Data Source: Value Research
That was an amazing piece of wealth creation by Manish. Over the last 20 years, he just allocated Rs.6 lakhs to the fund. But that small investment had grown to Rs.80 lakhs at the current juncture. What is more, he had earned an annualized return of 21.87% over the last 20 years and through the crashes, corrections and global turmoil, Manish had emerged truly wealthier.
(2) How Palak Joshi used his severance pay in 1996
For Palak Joshi, completing his MBA from Ferguson College, Pune was a dream-come-true, He came from a family of farmers and there were hardly any graduates. He felt doubly blessed when he was got a job as an equity research trainee in a top-notch brokerage firm. By 1996, he had not only made a name for himself but had also grown in income and stature. The stock market cycle turned downward in 1996 and his employer decided to exit broking altogether. Palak was just left with his last severance pay of Rs.50,000. He was lucky to be picked up by another company so money was not really the issue. But he took it as a challenge! He had been tracking consumer goods stocks at the brokerage house and had identified Havells as an emerging star in the market. It had everything going for it. It was radically changing the electrical goods market and was able to deliver world class quality. Palak decided to put his money where his mouth was and invested the severance package of Rs.50,000 in buying Havells.
Exactly 22 years later, Palak runs his own consultancy for corporates but he is still holding on to Havells. Interestingly, his small investment of Rs.50,000 in Havells has grown to Rs.19 crore today. Yes you heard it right! Palak does not even bother to calculate the CAGR returns because his dividends from Havells help him to recover twice his initial his initial investment each month. The capital gains are just the icing on the cake.
(3) Rakesh Arora believed that markets were all about opportunities
Back in 1997, when Rakesh Arora, a software developer, first spoke to his friends about buying software stocks, there were few takers. He spoke to some fund managers and analysts and realized that most of them could not see a shift, which he could see as a software insider. He decided to take some surplus funds in his bank and bought stocks like Satyam, Wipro, and KPIT etc. His idea was to make hay at some time in the future but he was pleasantly surprised when investment of Rs.1 lakh grew to nearly Rs.45 lakhs in less than 2 years. He was lucky to get out before the crash as his principle was that “If something was too good to be true, then it was not true”. He missed the last leg of the rally but Rakesh has no complaints. Over the next 20 years, he caught the capital goods rally in 2002, the real estate rally in 2006, pharma rally in 2010 and the automobile and metals rally in the recent past. Rakesh has churned money opportunistically through over 7 thematic rallies and his corpus of Rs.1 lakh in 1997 stands at Rs.6 crore as of today. There are times he could have done better but Rakesh has no complaints.
What the story of Manish, Palk and Rakesh underline is that there is no single secret to creating wealth. Of course, one needs to be in equities and one needs to give themselves time and patience.
This is a guest post by Raj Malviya. Facts and opinions expressed in guest posts are of the guest authors, not of the blog owner.