1. On stock market, what is the key to wealth creation? 3 steps to follow

On stock market, what is the key to wealth creation? 3 steps to follow

On Diwali day last year, the Sensex closed at 25,866 and now a week before Diwali this year, the benchmark is at 28,077 levels – point-to-point return of around 8.5%. Similarly, on Diwali day in 2014, the Sensex closed at 26,851. Over a two-year period, the absolute return is less than 5%.

By: | Published: October 25, 2016 6:06 AM

Diwali is around the corner and as we look at the Sensex returns over the past two Diwalis, the single-digit movements do not inspire confidence. But then that’s how statistics works. It conceals more than it reveals.

On Diwali day last year, the Sensex closed at 25,866 and now a week before Diwali this year, the benchmark is at 28,077 levels – point-to-point return of around 8.5%. Similarly, on Diwali day in 2014, the Sensex closed at 26,851. Over a two-year period, the absolute return is less than 5%.

If this is the kind of returns, why should equity be the choice of asset class for wealth creation?

Pick the right stocks

However, the Sensex is a constituent of 30 stocks with weightage assigned to each stock. The movement in the stock and their weightage, makes the Sensex move, either side. Again, the stocks are churned based on the performance. This means that the constituents of Sensex are not same every year. And this throws up the variance.

As in any other action, the key to wealth creation is not blindly following and investing in the Sensex stocks. It’s all about picking the right stocks. And these stocks need not be a part of the Sensex.

The global economy is witnessing interesting times. Japan is in a state of deflation and some of the largest economies are witnessing periods of low or negative growth.

India is, however, in a different zone. With the government slowly but definitely going about its task in hand of cleaning up the banking sector, bringing in greater financial inclusion by Jan Dhan and thrust on infrastructure development, the future augurs well.

Invest through mutual funds

Volatility in the markets are a given today. Sharp downsides followed by fast upswing should not weaken your heart or your investing process. An investor must pick up stocks based on their ability to grow and deliver and if he doesn’t have the skills for pursuing it, the mutual funds route should be considered.

Stock picking has over the last decade delivered multibaggers to investors. But then one needs to identify the stock and hold it for long-term returns.

Don’t churn frequently

Frequent churning of stocks is an activity and one must distinguish between trading and investing. Having a process in place is paramount. And once the process is in place, implementing and executing the process is what delivers returns.

Review your portfolio for any mid-course corrections. The benchmark returns over the past two Diwalis have delivered a low single-digit return. However, select stocks and mutual funds have created wealth for the investors. Stock picking is the key to wealth creation and that’s the way forward. Zero down on the stock and do not get swayed by market volatility.

The writer is founder and managing partner of BellWether Advisors LLP

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