Credo Capital

“Stock market is a mechanism for moving money from the impatient to the patient” Warren Buffett.

The most frequently asked question to me as an investment adviser is:

“Is it a good time to invest”?

My answer depends on

1. How much ‘time’ will you give for the investment to grow?
2. Are you investing to get rich ‘quick’ ? or do you want to create wealth over a long period of time?

Getting Rich Quick

Buying a fund or stock at Rs 10 and selling it at Rs 15 after a good year or two is getting rich quick. We can call ourselves smart for getting 50% returns in a short time. The flip side is that the timing can be wrong and you could end up losing money too as no one can predict short term movements.

Creating wealth slowly

Creating wealth slowly but surely on other hand involves investing monthly bit by bit and holding on to to your investments for at least a decade or two.  Here is an example.  Rs. 5000 per month invested in an equity fund like Franklin India Bluechip for last 20 years has resulted in a wealth of around 1 cr. And what was the total amount invested? Just Rs. 12 Lacs over a 20 year period grew at 20% per year (on an average, some years were up 40% and some down 20% or more)

This is an excellent example of get rich slowly but surely.  Will the past return of  20% p.a be repeated in future ? Im not sure, but 15% p.a is quite possible. Would investing Rs. 5000 p.m been a big commitment back in 1995?   I was studying in college then so could not have afforded it. I know people who could have, but did not.

The brighter side is you can invest higher sums even today as salaries have risen compared to 1995, if, you invest Rs. 25000 monthly now for 15% return your wealth can grow to Rs. 3.78 Crs after 20 years. As an investor I’m sure you would be happy with this kind of wealth any day.

A slow and steady disciplined approach to wealth creation far is better than jumping in and out of markets assuming that one can get rich quick. It is always better to be the steadfast tortoise than the fast running hare.

Star Tortoise – Vandalur Zoo picture courtesy : Srividya

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” – Warren Buffett

Though we learnt it in the 6th standard or so, understanding this is not easy, small shop keepers have understood it to make millions while many with degrees in finance struggle to understand it.

And how long would it take to get to 1 crore ??

It was somewhere in 2011 that i got a call from Economic Times journalist Prashanth asking for my views about how people should deal with sudden fortune coming their way. The context was that a Kaun Banega Crorepati participant Sushil Kumar had won for the first time 5 Crs in the contest. Prashanth wanted me to tell how should people go about investing that kind of one time fortune, my view was that this kind of luck was unlikely to be repeated hence one should be extremely cautious as windfall gains would be followed by spending spree leading people back to square one.

You can read the 2011 report in ET below :

http://articles.economictimes.indiatimes.com/2011-12-01/news/30463210_1_reality-show-fortune-goa

Today just over three years later Hindustan Times reports that Sushil Kumar is indeed, more or less, back to square one.  http://www.hindustantimes.com/india-news/fickle-fame-the-jobless-kbc-winner-with-little-cash/article1-1313778.aspx

My view was that people do not respect large sums of money that they get unexpectedly as they :

1. Did not earn it (whether the money came via rich uncle who left an inheritance, stock options, lottery or KBC) so they start doing things that they would not have done otherwise like building a bungalow where a small house will do. Precisely what the above winner did.

2. instead of investing the money in FD’s, tax free bonds, some equity and a small house which can preserve and grow wealth people start ‘playing ‘ with the money in business ventures where they have no experience, loans to relative and friends etc. There is a mention of an FD interest that seems to be sustaining Sushil Kumar these days, that and the four cows that give him milk everyday seems to be the only return that he is getting.

No wonder his wife is upset 🙂

The reason for this is a fancy term called mental accounting, as we feel the money is free. It is not free,This thinking is mainly responsible for many who get large sums unexpectedly to lose it real fast and come back to square one. money is money and it does not care whether you got it via stock options or won the KBC or worked hard for saving it. So it is up to the individual to respect the money by investing it wisely whichever legitimate way it reached your bank.

As we wrote yesterday even a genius like Mozart could not sustain overspending

One way we can all not fall for this is to plan well for it, save and invest wisely so that wealth that came unexpectedly stays with us and does not go away as unexpectedly as it came leaving us much more miserable had it not been received in the first place.

http://en.wikipedia.org/wiki/Wolfgang_Amadeus_Mozart#mediaviewer/File:Croce-Mozart-Detail.jpg

There once was a man who became the most famous composer in the world but was utterly miserable most of the time, and one of the reasons was because he always overspent his income. That was Mozart. If Mozart can’t get by with this kind of asinine conduct, I don’t think you should try.” – Charlie Munger

Indians have always been good savers but poor investors, but even that saving is coming down as we become more global and it is not tough to find youngsters buying mobile phone worth a month’s pay but do not have even one months savings in bank for an emergency. Worse they have liabilities that needs to be paid like credit card EMIs etc.

Mozart as the quote above says was nothing short of genius as we listen to his music even now but he was miserable as he had a tendency to overspend. Profligate spending leads to trouble whether one is Mozart or Mike Tyson as we saw earlier. Before starting to invest, ensure first that you have around 3 months of expense saved in a bank, and then start investing for long term growth, remember if a genius like Mozart had to suffer we better be prepared as the scouts say.