NUGGETS OF WISDOM FROM THE MARKET
.......there are two types of people in the stock market: “People with experience and people with money. During a bear market, people with experience end up with the money and people with money end up with experience”.
The year was 2005. I just turned 19 and the first thing I did was open a demat account and borrowed money from my father to buy some shares of Wipro Ltd. Since then a lifelong fascination of making money with money captured my imagination. It was this quest to understand how the global financial systems spew money out of seemingly nothingness – a kind of financial alchemy – that sustained my love and dedication for stock investments.
Having survived (yes, it was that bad) the Great Financial Crisis of 2007-09, that Great Recession both humbled me and taught me the essential financial lessons to make money from stock investments. And over these 17 years of being in the market, I can proudly say that of many unconventional roads that I’ve taken, the road to stock investments has been one of the best!
India has a literacy rate of about 77%; however, only 24% of its population is financially literate. Yet more dismal is the number of Indians who invests in stocks, a mere 2%! Any knowledge of finance will tell you that it's risky to put money in bank fixed deposits that earns a mere 5% interest when the inflation is hovering above 14%. This means, your money is losing value @9% [14% inflation – 5% fixed interest = 9%] yearly, while a financially prudent person will look for a good investment return of more than 15% to sustain itself. Why 15% return? Because any sustainable financial return should be greater than the added value of inflation [WPI @ 14%; CPI @ 5%] and government bond coupon [currently @ 6.5%].
Whether you count Wholesale Price Index (WPI) or Consumer Price Index (CPI) as the inflation figure to calculate your financial numbers, the fact of the matter is that any financial investment return less than 15% in India is not enough to cover your future expenses.
Over the years, I have discovered that it is always useful to listen to the wise voices of the financial markets, who have garnered enough experiences to share with us their nuggets of wisdom. So today, I am sharing the three gems whose opinions are important to me and for my financial investments and which, I believe, might benefit you too:
Warren Buffett: He needs no introduction. Buffett is the richest investor of all time. With a net worth of more $100 billions, he has made his entire fortune from stock investments. His prudent wisdom to stock investing can be guessed from his quotes, which are enough to enlighten a budding investor.
“Risk comes from not knowing what you’re doing”. This quote by Buffett is an apt summery of what to do in the stock market. If you do not understand the business model of a company, then chances are that you’d risk your money investing in that company. It is only when you understand the business model and its financial state that you can find a profitable investment opportunity. Hence, his next quote concludes this philosophy succulently, “Never invests in a business you cannot understand."
Charlie Munger: The business partner of Warren Buffett and an equally wise investor, Munger is renowned for his speeches on psychology; the most famous being the Psychology of Human Misjudgement, delivered at Harvard in 1995.
“Spend each day trying to be a little wiser than you were when you woke up.” This quote by Munger aptly summaries the attitude a successful investor needs to have and which differentiates him from the wannabe investors. Getting better at something requires regular practice and a disciplined approach. You name any successful investors of all time, and the common thread running through them is the dedication to learn something new about their craft every day. Nothing is far from truth when he said, “A lot of people with high IQs are terrible investors because they’ve got terrible temperaments.” Temperament simply means nature. Mold your nature; modify your life’s outcomes!
Ramesh Damani: An Indian investor and a member of BSE, Damani has been a prudent voice among the clatter of stock investment in India.
According to him, there are two types of people in the stock market: “People with experience and people with money. During a bear market, people with experience end up with the money and people with money end up with experience”.
Personally, I like to listen to his speeches and interviews. In one of his speeches, he dissected the stock market investment secret out in the open and in a very prudent way. He is an advocate of compounded returns (CAGR=Compounded Annual Growth Return) on stock investment. He gave a very simple illustration to great wealth creation. If you have ₹10 lakhs invested in stocks that doubles in every three years (at an annual compound growth of 24-25%), then after 30 years the same amount will be worth a whooping ₹100 crores! That is the power of stock investment and compounded growth.