Equity investing: Creating wealth with discipline and patience

Published: September 16, 2019 2:11:25 AM

Every year when he invested money it turned out to be the lowest Sensex level for that year and he got the best buy-price every time. Star-crossed faced the opposite fate.

Equity investing, discipline, patience, creating wealth, asset class, personal financeA rub-of-green is always welcome but not necessary for wealth creation.

By Mayank Joshipura

Many of us believe that equity is a risky asset class and one needs stock-picking and timing skills and a bit of luck to create wealth. But what if I have none of these on my side? Can I still create wealth by equity investing? The answer is ‘yes’, provided that you have the patience and discipline. A rub-of-green is always welcome but not necessary for wealth creation. That is the power of dumb money. As Warren Buffet said: “Paradoxically, when ‘dumb’ money acknowledges its limitations, it ceases to be dumb.” Discipline and patience

Well, you have heard it right. You just need discipline and patience to create wealth by investing in equity. It is difficult to believe, so let me tell you a story of three friends named Fortunate, Star-crossed and Composed. They started investing in the year 1990 and have been investing in a disciplined manner for 30 years. They decided not to go for active stock picking and invested equal sum money in BSE Sensex once a year, every year.

While Composed chose not to time the market and invested on the first day of every year, Fortunate got lucky with his market timing. Every year when he invested money it turned out to be the lowest Sensex level for that year and he got the best buy-price every time. Star-crossed faced the opposite fate. All these years, whenever he invested money it turned out to be the highest Sensex level for that year and got the worst buy-price every time.

The trio met on the final weekend of 2018 and reviewed their equity investments. Fortunate earned the highest CAGR of 16.06% and Starcrossed earned the lowest CAGR of 12% as expected. Composed earned CAGR of 14.78%. All three were happy as they earned reasonable returns that outperformed most asset classes and enjoyed an additional 1.5% of annual dividend yield.

Yet, relatively, Fortunate was disappointed. She said, “Despite investing at the lowest level every year, I could earn only 1.28% higher than Composed. Just 1.28% for my luck! This is unfair. Star-crossed too looked disappointed but for a different reason. She said, “Instead of failed market timing attempts, if I had invested like Composed I would have earned better returns.” Composed said, “I am happy that with no stock-picking or timing skills I could earn returns that many investors envy.” We all know that it is not possible to replicate Fortunate or Star-crossed in real life. The only thing you can do is to replicate what Composed did to create wealth.

Creating wealth Last but not the least, you may say that it is a good story, but don’t forget that the trio invested in Indian markets and that is enough evidence that they were lucky. Had they lived and invested in Japan for past 30 years, they would have faced ruin.

Nikkei hit its lifetime high of 40,000 just before 1990 and has been struggling at 20,000 today even after 30 years. It could never reclaim its highs! That is true, but our trio would have earned CAGR of 2.77%, 2.13%, and 2.35%, respectively even if they had invested the constant sum of money every year in Nikkei instead of Sensex. Add to that an average annual dividend yield of 1.5%. The total annualised return of 3.5/5% is a great return in a country where the bonds would have hardly earned 1% and inflation has remained near zero all these years.

So, if you can invest in a disciplined manner and stay calm for long periods of time, you need not worry about stock picking, timing or luck; the power of dumb money and compounding will work to create wealth for you.

(The writer is professor, Finance, School of Business Management, NMIMS, Mumbai. Views are personal)

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