power of forgetting the wealth creation mantra
power of forgetting the wealth creation mantra

A study of macro and micro economic
factors always helps to make the right decision for investments and for wealth creation. People who want to make a quick buck in the stock market are the ones who are paranoid. Time and again, equity markets have taken investors on a roller coaster ride and hence, they fear losing money more than gaining it.

In 2004, the Indian markets crashed after the general elections on fears that a coalition government will not be able to do much for the Indian economy. Post 2014 elections, people were more hopeful with a single party coming in power.But after both the elections, the markets continued the uptrend. Why is it so and what does it teach us? Let us see.

Until a few years ago, the stock market was closely associated with gambling and was called the ‘Satta Bazaar’. This image is now being replaced by investing considered to be an intelligent activity involving skill, timing, monitoring and analyses. Retail investors are now attracted to the equity markets and this change is certainly encouraging. The strength of our markets can be gauged by the fact that earlier we were heavily dependent on FIIs. But now, the DIIs show equal strength as seen in the markets over the last few months.

Although these are encouraging factors they are not good enough to boost retail participation in the stock market, which is less than 5% even today. Mutual Fund Houses recorded a sharp growth in subscriber base over the last two years with a record closing of 5.71 crore subscribers as at May 2017 end (Source: AMFI), which is still very less compared to some of the developed economies such as USA and China.

What is the reason for this? Many attribute it to some of our social parameters such as poverty, higher illiteracy rate,financial awareness, etc, which is true to a certain extent. However, the biggest parameter, according to me, is the diminishing patience among investors. In the era of fast-food, we typically want everything else to be equally fast but that doesn’t work always. You would have definitely heard from somebody in your lifetime say that – “My grandfather holds xx number of shares of yy company and its value has increased multifold now”.

Why is it ‘many times’? American Mutual Fund, Voya Corporate Leaders Trust Fund, earned 3,600x returns on its portfolio over 82 years. Isn’t this amazing? “Patience can conquer destiny”, is an Irish proverb. I call it the ‘Power of Forgetting’.

Time and again it has been proven that equities outperform government bonds, corporate bonds, property and many other types of assets. But then why is it still said to be risky? Nothing in this world fetches returns without any element of risk. Stock prices fluctuate and are therefore risky by nature. However, if one applies the right investment mantras, the risk element is minimized to a great extent.

The most important mantra is ‘Find the right investment opportunity and then hold on to it with patience’.

Let’s take an example of technology giant Wipro Ltd, which has delivered returns of 42.85% CAGR since 1980.

With 100 shares of Wipro at an initial investment of just Rs.10000 in 1980, one would end up with 1,92,00,000 shares of Wipro in 2017.With a closing price of Rs.280 on 29 September 2017, the value of investment works out to Rs.537 crore! Now what happens if you get tax-free returns of Rs.6 crore on top of this investment every year?Isn’t that the icing on the cake? Wipro pays an average dividend of Rs.3-7 every year and at a conservative dividend of Rs.3, it’s a whopping Rs.5.76 crore. Every year tax free in one’s hand.

In 2003, Wipro’s share price was around Rs.40. Thus, an investor would have gained around Rs.4.5 crore on selling at that time. Even though the returns were decent (44% CAGR), however, the value (Rs.4.5 crore) was far less than what it fetched after 15 years (Rs.537 crore). What this really demonstrates is the ‘Power of Forgetting’. The more patience you have with quality stocks, the more returns you are bound to get.

Looking at this calculation, one may wonder if it’s the right time to enter the stock to fetch the same kind of returns. Perhaps not since the stock has not delivered similar returns over the last 5-7 years.

Hence, the new mantra is – ‘Enter at the right time and at the right price’. In the 1990s when tech stocks seemed to double in value every day, the notion that you could lose almost all your money seemed absurd. But by the end of 2002,many of the dot-com and telecom stocks had lost over 95% of their value and once you lose 95% of your money, you have to gain 1900% just to get back to where you started. Therefore, entering at the right time and at the right price is the key. And once you do that, let the money work for you or enjoy the ‘Power of forgetting’.

If investors knew that Wipro could deliver such gigantic returns, everyone would have invested in this stock in the 1980s and become billionaires by now. But how many of us would have dared to invest Rs.10000 at that time when the average per capita income in India was less than Rs.2000? So, there is an important lesson to be learnt here: ‘Do not be afraid of taking risks if you believe that it is the right investment opportunity’.

Many of such quality stock have delivered great returns. An investment worth Rs.10000 in Infosys in 1993 is Rs.11.38 crore as at 29 September 2017 or an investment worth Rs.10000 in Asian Paints in 1983 is worth Rs.5 crore today.

While all this is true, it is equally important to understand whether the selected investment can sustain for such a long period. Voya Corporate Trust started off with 30 companies. Today after 82 years, 21 companies remain in its portfolio.

Equally, true is the fact that many Indian stocks have eroded investors’ wealth as well. Just Dial, India’s local search engine, faces fierce competition from global giant Google and many local mobile apps and has continuously fallen after hitting a high of Rs.1894 in August 2014 to Rs.404 today. RCom, which revolutionized the telecom sector, is continuously drifting lower from a high of Rs.844 in 2007 to below Rs.18 today on account of the high debt on its balance sheets. Videocon Industries, which traded at over Rs.800 at one point, trades at Rs.16 today again on account of high debts. It is, therefore, equally important to review your investments from time to time in order to avoid such losses.

In conclusion investors must identify sound investment opportunities and enjoy the creation of wealth by applying the ‘Power of Forgetting’ principle. Some of the sound stock investment ideas that investors can keep on their radar are HDFC, HDFC Bank, State Bank of India, Larsen & Toubro, Mahindra & Mahindra, UltraTech Cement, Grasim, Tata Steel and Tata Motors.

Power of Forgetting” is the key principle to fetch such gigantic returns. But choosing the right stock is a must before applying this principle. Keep investing and keep reaping benefits over the long-term.

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