Wealth Creation In Indian Context

The term has a different meaning for everyone. For the poor man it would mean a few hundred rupees in cash and for a stock market investor of any significance it would mean a stock portfolio of millions of rupees. As wealth means different things to different people in the context of investment it would mean building a good financial assets portfolio.

In the Indian context wealth creation of any significance can be achieved primarily and largely only through the equity route. Though the concept of wealth creation is much broader we will restrict our discussion only to creation of wealth using equity.

My experience of more than three decades has shown to me clearly that there are a few thumb rules which, if followed can lead to huge wealth creation.

a)Long term is the only route to wealth creation. Everyone speaks of long term investment but I have seen very few investors who really think long term. Most of the time we invest with the idea of making a fast buck, but when the bet goes wrong we continue to hold the stock and become long term investors by force. To put it in a different way we book profits too early and hold on to losses for a long time and thereby seriously hampering the process of wealth creation.

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Holding on to stocks for the long term almost always yields above average return if the number of stocks in your portfolio is above is reasonably large. More of that later.

Holding on to stocks for the long term-above ten years has given extraordinary returns to the investors in the past. Some examples: Maruti Stock has gone up about 30 times in less than years, ICICI has probably risen more than 150 times since its IPO 2 decades back and an open market buyer of MRF shares would now be sitting on a market value of the same stock which is more than 200 times his investment. Let me remind the readers that these all are multiple times gains and not percentage. And these are only three examples. In the market there are more than 300 such stocks so hitting the jackpot is not as difficult as it appears.

b) Consistency is the key. Most retail investor are very fickle minded and are generally swayed by event of the recent past. Because of this tendency they are not able to follow a consistent investment policy. And that is the reason why they are not able to create long term wealth.

What do we mean by consistency? If you follow a policy of booking a loss in any investment if it loses say 20% in value you may miss some opportunities but over a longer time frame the proportion of dudes of your equity portfolio may come down significantly leading to better wealth creation.

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Take another example of consistency. In India retail investors are traditionally active investors in IPOs, unlike their counterparts in the western countries. Most of such investors have a inconsistent policy of selling the shares allotted in the IPOs. They sell some stocks immediately on listing and hold on to few other stocks and keep them in their portfolio for an infinite period.

Deciding on either selling on listing day or holding on to all allotted shares forever would enhance wealth significantly as compared to the inconsistent, random system of sharing.

c) Having maximum 20 stocks optimises wealth. On observing various investor portfolios over the last three decades I found that most investors are having heavily lopsided portfolios. A typical portfolio has about 75 to 125 stocks consisting of about two third stocks allotted in various IPOs in the past, about 15% losers bought years back and only 15% to 25% stocks of any significance. To create long term wealth this is not the way to go. If you are one such investor the first thing you need to do is to get out of the old IPO holdings and add that amount to the winners in your portfolio. A 10 to 20 stock portfolio will also have a few losers, a few inactive stocks but it can be monitored better and your chances of maximising returns on your winner stocks increase.

d) Nothing better than doing our own research. Equity research is a term which has been glorified over the years across the world. Equity research has carried out by large funds and institutions is a highly complex, data and algorithm driven exercise. Hearing and reading about this creates a halo around the term equity research in our mind.

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It is true that the equity research process can be made highly complex and methodical. But it is equally true that the research we need for our purpose that is wealth maximisation can be carried out by anyone even someone without a background of finance. Any 20 year old could have seen the prominence Idea was gaining in the telecom space couple of years back. If anyone would have invested in Idea stocks then, her wealth would have risen more than 3 times in less than three years.

Similarly investing in companies like Hindustan Unilever or ITC whose products are all around us and many of them are used by us regularly. For investing in such stocks one doesn’t need deep financial knowledge. And look at the   wealth they have created for their shareholders over the years.

e) Disregarding tips, rumours and “operators” information is critical.

All of us have fallen into the trap of investing on the basis of some insider tip or news of some operator driven activity or market rumours at one time or the other. Let me assure you that no one has made money or created wealth through this route, anywhere in the world. So friends this are a few stray thoughts on wealth creation in the Indian context through my personal experience. Wishing DSIJ a happy anniversary and the readers prosperous investing.