A few weeks ago, I met one of my childhood friends, a mechanical engineer. A major financial commonality between us is that we invest in the equity market. When our discussion finally touched our personal lives, my friend did mention that last month, he bought his dream imported motorbike by selling his whole equity portfolio, which almost doubled in the past two-and-a-half years.
Bikes, indeed, have become a huge attraction for young millennials over the decades. But for an investor, buying a bike is no good idea since a vehicle is a depreciating asset.
Morgan Housel in his book The Psychology of Money says “it is more difficult to stay rich than become rich”. A survey conducted shows that most American lottery winners have become poor soon ( typically within two or three years) after the sudden spike in their wealth. A major reason for this is a lack of financial awareness. They tend to spend uncontrollably on unnecessary lavish lifestyles and depreciating assets such as luxury cars which not only require huge spending when purchased but also attract higher tax obligations and exorbitant maintenance charges.
Phenomenal participation
During the pandemic years, India experienced a phenomenal participation of retail investors in the stock market mainly due to the endless time people stayed at home, emergence of discount brokers and availability of market tips on social media platforms. Data suggest that in 2021-22 as many as 14.2 million new demat accounts were opened which is three times more than the number in the previous fiscal year. The surge in accounts does not suggest the sustainability of such investment in the market as these investors mostly follow tips from online platforms and tend to speculate.
If they correctly follow the rules and principles of investment, they may create tremendous wealth in the long run. A number of bold reforms taken in the past few years, such as the GST, the Insolvency and Bankruptcy Code, bank mergers, the bad bank, and the PLI scheme, strengthened the economy significantly and will continue benefiting the economy in the long run. Hence investors should believe in the long-term story.
Retail investors’ participation in the Indian stock market is a welcome step. But it is imperative that they learn to be patient with their investment. They must respect the power of time and the magic of compounding. A rise and correction in the market is as normal as day and night. Hence, it should not distract them from long-term goals.
Indian millennials who entered the market in these years have time on their hands. A simple mathematical calculation reveals that if an individual at the age of 25 can save at least ₹2,000 a month and invest it in a sound mutual fund providing an 18% annual growth rate, the individual at his retirement is expected to create a wealth of ₹ 7.02 crore. This explains the power of time.
Active investors investing directly in stocks should spend a significant amount of time in research. For an active investor, reading company balance sheets and cash flow statements, checking important parameters such as PE ratio, RoE, RoCE and overall debt are as important as diversifying his/her portfolio across sectors to avoid risk. Only with reading great investors and gaining practical experience can Indian equity investors create enormous wealth with time.
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