Compounding Machine: The BSE SENSEX has compounded at a rate of roughly 15% over more than three decades. So, it is safe to conclude that it is the inherent nature of the stock market to rise continuously in the long run in country where the economy is developing. There are two critical components in this explanation -
- Markets will rise in the long run - If markets are set to rise in the long run, the first thing you need to do is to be a long-term investor. You need to give the market time to compound your money.
- The irony is that we are extremely patient with gold and property. We buy and hold them for years or even decades and then marvel at the wealth they have created. Each one of us have heard stories from our parents about how gold and property were extremely cheap back in their days. So, while we hold gold and property for generations with the understanding that it takes time to create wealth, we are somehow extremely impatient when it comes to stocks. The same bunch of people who held gold for a generation suddenly expect the stocks that they have bought to double in 6 months.
It's better than your family business
If you are a businessman or someone in your family is, you realize how much of a grind it is to generate handsome return on invested capital. Even with the best of knowledge, experience, goodwill and 365 days of hard work, time and energy, it is difficult to attain more than 20% return on your investment. Imagine here is a business that you devote your life to, bear liabilities, risks and stress. Sacrifice time with kids, parents and spouse. Suffer harassment from bureaucrats, authorities and the taxmen. You do this year after year for your entire working life in order to generate 20-25% return on your investment. Somehow we want a 100% return on our investment form the stock market without doing any of these. Stock market is either considered as a casino or a fairyland where all your wishes will come true in a magical way.
It's not your ticket to a lottery !
We spend an entire day hunting for a watch or a pair of shoes we want to buy. We go from shop to shop, checking out every minor detail about the product before making a decision to buy a thing that costs between a few thousand bucks. Yet we don't do an iota of research before buying a stock suggested by a friend or an expert appearing on the TV. and invest lakhs on the market with no knowledge of what the company does. If we research as just as much as we do before buying a shirt, I am sure you will be able to avoid 80% of the blunders that you could potentially commit.
Look at the larger Picture
We often fail to examine the stock market objectively. Think of it this way, our entrepreneurial instincts are often hampered by the lack of one of the following factors:-
Stock market is an institution that helps in overcoming all such constraints. You are not constrained by capital, since you can even invest a few thousand bucks. Further, experience and expertise are not a problem because you can choose the Tata’s and the Godrej’s of the world to work for you. They will invest their time to work for you while you enjoy life the way you want to. And what’s more…...there are more than 3 thousand businesses to choose from. We give money to our friends and relatives to manage. Shouldn’t we instead, give that money to the greatest businessmen in the world to manage it in a more efficient way?
This is the power of the stock market.
But don't just believe in the power of the market, believe in the old wise saying
As you sow, so shall you reap.