Why Should You Invest in Stocks?
In India, individuals are generally ‘under-invested’ in stocks and ‘over-invested’ in gold & real estate. Stomach this – A whopping ~67% of an Indian households’ wealth is concentrated in gold and real estate. The merits of investing in gold and real estate are so deeply ingrained in our psyche that we tend to turn a blind eye even to the returns generated by these asset classes vis-à-vis stocks. The fact that only ~2% of Indians invest in stock markets unlike our Western & Chinese counterparts where the participation is in double digits, bears a testimony to the deep-rooted cultural bias for gold and real estate.
- A Vehicle for Long-Term Wealth Creation – Equities Vs. Other Asset Classes
Fixed Deposits, Gold & Real Estate have been the darlings of Indians – A chunk of their savings are parked in these asset classes. But just pause and spare a moment reading the below table.
| Rajesh Khanna’s Bungalow, Carter Road | Samudra Mahal, Worli | Gold (per 10 gms) | Stock Markets (Sensex) | MRF Tyres – Specific Stock | |
| Year of Purchase | 1970 | 1970 | 1970 | 1980 | 1991 |
| Year of Sale | 2014 | 2013 | 2014 | 2014 | 2014 |
| Purchase Amount (Rs.) | 3.5 lacs | 700/sq ft | 185 | 100 | 25 |
| Sale Amount (Rs.) | 85 crores | 1,18,000/ sq ft | 29,000 | 27,000 | 29,000 |
| Returns (% CAGR) | 19.4% | 12.7% | 12.2% | 17.9% | 35.9% |
Sensex Vs. Gold – Sensex, the benchmark for stock market’s performance, has clearly outperformed gold by a huge margin since its inception. You may be further surprised to know that gold has delivered a meager ~4.5% returns since 1920.
Sensex Vs. Real Estate – “Real Estate is a sure-shot way to become rich! Real Estate prices in India rise only one way: upwards!” For most Indians, this statement is like a gospel truth. Questioning this belief is almost blasphemous. Undoubtedly, people have earned a fortune in real estate in certain pockets. But, what they seem to miss is that the Sensex has out-performed even certain posh locations (illustrated above) in a city like Mumbai.
Stock-Specific Returns Vs. Other Asset Classes – Clearly, investing in quality stocks can significantly surpass the returns from other asset classes: MRF, the tyre-maker, has delivered a compounded annual growth rate of ~36% in 24 years.
Clearly, there are several examples which indicate that a stock-specific approach has the potential to deliver super-normal returns vs. other asset classes over long time horizons.
- A Tangible Way to Participate in India’s Growth Story
India is estimated to become the world’s 5th largest economy by 2020 and fastest growing as well. India will continue to be one of the most attractive markets with all the long-term structural drivers in place – favorable demographics will increase aspirational demand which in turn will spur consumption, India’s prowess in services industry is expected to improve while the Govt’s focus on manufacturing sector could provide a fillip to India’s exports.
You can benefit from this growth story in the form of salary hikes if you are a salaried individual or in the form of higher profits if you have your own business. Apart from your own business & employer, there will be innumerable other businesses which will contribute to India’s growth. You can meaningfully participate in their growth & grow your personal wealth by investing in quality stocks/ businesses as India continues to be in a multi-year bull market.
- Invest in India’s Best Entrepreneurs
Quitting your job and creating your own start-up may sound like an exciting way to become a multi millionaire. However, it’s not possible for most of us to do it – there is a risk of failure, there could be lack of business acumen or lesser than required entrepreneurial zeal or one may simply like to continue one’s job.
For those of you, who are not too excited in taking the start-up route, there’s no need to feel disheartened. You too can increase your wealth by partnering with India’s promising entrepreneurs – Invest in stocks/ companies which are run by able and passionate management with integrity which have underlying healthy business prospects.
Examples abound – The share price of Page Industries (popular for its iconic Jockey brand) has become ~50 times in last 8 years, Symphony (air-cooler) 740 times in last 8 years and Acrysil ~30 times in last 9 years.
Equities are ‘growth-oriented’ assets which should find its fair-share in your investment portfolio. Unfortunately, most people tend to forget that “Time spent in markets is more important than timing the markets.” Unlike real estate, stock prices are visible daily making it very alluring to resort to a la gambling activity – Buying/ Selling stocks frequently without understanding the underlying company’s business, competitive strengths, balance sheet, etc. This sort of behaviour, in all likelihood, will result in severe losses and lead the ‘investors’ to believe that stocks are very veryvery risky.
How Can You Start Investing in Equities?
There are broadly 2 ways – Actively & Passively. If you have the interest, inclination and the time to research companies then you could explore investing yourself directly in equities. But, if the answer to that is NO, then you should do it passively – seek a professional’s help; either through Mutual Funds or an Investment Adviser. But, undoubtedly, a stock-specific approach can prove to be the most rewarding way to create long-term wealth.