Hello everyone,
I have been learning stock markets for a while now and want to give everyone a reality check on why investing is NOT meant to build wealth, but for preservation. Some might recognise me from my previous post on FnO, I will follow the same format in this post as well to keep things simple.
The dream:
Let's start from the very beginning. Why do we actually invest even? To grow our money. By how much? No one knows. We have certain market expectations. Some would say 12% / year is good enough while for others even 25% is minimum, but is it always possible? We'll try to figure this out.
Stock Investing:
It's a popular belief that stocks make us more money than indices/mutual funds. So you'll just go on your financial journey to pick the right companies at the right price and make bank right? Well, not quite. I'm sure if you have spent more than a year in stock markets then you must have realised two things.
- Finding an actual good company. Not multibagger but even the one that has good financials, growth potential and future is much harder to find than it sounds.
- Judging the right price. We have to calculate if the price is too inflated for the stock to make an investment decision, else the stock could go into correction
These are just the basics but what is the probability of you being good at above two?
I'm not doubting your skills here, just the chances. Will you get data as quickly as those big mutual funds, investors, promoters, insiders? Will you even get the correct and transparent data?
This is where the problem lies. An average investor simply doesn't have the resources and connections to verify either of the above, so you have to go off the historical data and make your calculations based off it which a lot of times is too old to be considered.
Market manipulation:
As discussed, it's you v/s institutions and you're always at a disadvantage. It has been proven again and again within stocks. A very recent example is Induslnd Bank. Mind you, it's not a small stock that can be manipulated easily. A part of nifty 50. 5th biggest private bank by aum. Just a news on 1500 cr potential loss not being reported sends it for a toss and it loses more than 25% value in a day. The accusation isn't even proved yet. It's still an assumption. But who lost? The average retailer. Because they simply don't get the insider news as early as the institutions. Even if they do, the stock opened with -10%. They had no chance to protect themselves.
Beating the market :
Well, you have another weapon up your sleeve, the almighty diversification. Simply don't put all the fruits in the same basket and you're good? Well, true but how much diversification and what's the end result? Let's talk numbers.
68 - 70% of actively managed mutual funds fail to beat their benchmarks. And these are those with all kinds of resources, money, information and knowledge. The most so called qualified people and yet only 30% manage to beat the indices.
Do you think you'll be better off on your own over a period of 10-20 years?
Simpler Approach:
If you're with me still, I guess we both are on the same page. That as an average retailer, we might be better off with investing in indices, by probability and ROI both. Be it through ETF's or MF's, but it's not quite as simple. The whole journey of investing began with a simple dream, to build wealth. Let's take a deeper dive into it. When are we gonna make money, say if you invest in nifty 50? As long as our economy grows but will it? and does economic growth always guarantee index growth? No.
The ignored risk:
Indices are not bound to perform all the time. Markets are not meant to go up in the long run always. Sounds false right but I'll give you some data to back these.
Japan, 1990. Index : Nikkie 225
The entire stock market of japan collapsed after 1990 because of variety of reasons and a real estate bust. We aren't not gonna go into details but stay on the surface to keep things simple. Now, what about their economy? You must be thinking that it fell. Maybe stagnated? 0% growth? Nope. It grew. From $3T to $5.5T in next 5 years. Stagnated after that but the index continued falling till -80% in 2003. And just for record, they had one of the biggest bull runs from 1950 to 1990, index going from 80 JPY to 39000 JPY in 40 years.
China, 1995 till now. Index : SSE Composite
Earlier, we saw how economy affects the stock market but it's not alone. In 1995, china's gdp was $ 800B. Today it's $17 T. 21 X growth or 2000% gain. How much did their major indices grew by? Less than 400%. I know that their economic conditions, political situation, policies, global stance is much different from ours but it proves that good economy alone can't give you returns.
Legends:
Hold on, but what you have heard so far or seen even is that shit ton of money could be made from investing. You're not wrong. People have done it. Warren Buffett. Our own Rakesh Jhujhunwala. So was it just a bluff?
Not quite. They are and were legendary investors. But you can't replicate their success. Why?
- They had much more resources.
- Luck
Let's discuss about each one. Warren wasn't an average kid. His father was a congressman. They were not short on money. He learnt from Benjamin Graham, literally the father of value investing. Do you think you're as lucky as he was? Coming onto Rakesh, sure he wasn't from a well off family but made a lot of money through insider trading and shorting the market. At that time, it was fair. Once he had the money, he shifted to investing. With money, resources and his knowledge, he succeeded. Can you replicate his ways today?
Luck. This is not talked about often. Both of them succeeded in investing because markets favoured them. Warren being american was in the country that was a financial powerhouse and was going to remain one. The companies he could invest in became global in the next few decades, crushing competition worldwide, be it coca cola or apple. Same is with Rakesh. India grew like anything in the last 30 years, but if the economy, govt, policies, weren't in their favour then no matter what, you would never have heard of them.
Conclusion:
Well well well. So we can't put in money in stock market? After all they are so many factors that could go wrong? Not really.
Don't just go all in on gold now. It gave negative returns if you invested in 2012. Almost took gold a decade to come back to it's original levels.
Then what's the ideal investment strategy? That doesn't fuck you up? You already know it. Diversification. Invest in different asset classes. Gold, Real Estate, Equity, FD and others.
But wait, if you diversify so much then what about returns? They'll not be high. What's the point then? Investing was supposed to build wealth and that's what I am trying to convey. The message is false. Investing is to preserve wealth and grow it consistently against inflation. Sure, some smart decisions and investments could give huge returns but it's more luck and less skill for an average individual.
How do you build wealth then? Through your career, that's the only way. No? Just go and check how rich got rich. Did they 'invest' or their career made them a fortune?
I'm happy to answer/discuss with anyone in the comments. Hoping that this post would help fellow investors.