What Could Be The Best Wealth Creation Strategies For Equity Investments?

19 Feb 2019by Research and Ranking

What Could Be The Best Wealth Creation Strategies For Equity Investments?
Wealth creation strategies can help you build immense wealth over a long period of time. The absence of an effective wealth creation strategy may result in delay or compromise in one’s financial goals. Ever wondered if you stop working today, how long can you continue before going back to work? As Warren Buffet rightly said, “If you don’t find a way to make money while you sleep, you will work until you die". This reminds me of a famous story coined as ‘The Parable of the Pipeline’. In a small village, there lived two friends named Pablo and Bruno. One day, the village mayor gave them a job to carry water from the distant river outside the village for payment of Rs. 1 per bucket they carried. On the first day, both earned a good amount of money by doing 50 trips carrying heavy buckets. One day, Pablo thought of a wealth creation idea by building a pipeline from the river to the village. When he shared the idea with Bruno, he made fun of Pablo and told him that he is happy with his income. Pablo was very confident of his wealth creation idea that he decided to construct the pipeline on his own by digging the ground in spite of being ridiculed by Bruno and the villagers. Bruno started splurging on his money by buying new things and spending his evenings at the local bar. But after few months, Bruno started looking tired due to wear and tear of his body. On the other hand, Pablo’s relentless work helped him to finish his pipeline which helped him deliver more water to the village without physically carrying it. Pablo recovered his investment in a very short time and the implementation of his wealth creation idea resulted in income generation without him working every day. Like Bruno, most of us try exchanging time with money. We forget that we only have a limited amount of time to generate wealth by investing our wealth. In order to achieve our short-term goals, we forget about our long-term wealth creation investing. Now the quintessential question is: How can you create wealth? Equity is the best way to create sustainable wealth in the long run. One look at the below table will tell you why. Returns (CAGR) Of Asset Classes (In %) Source: Real estate:ibef.org. Gold price: GoldPriceIndia, FD rates: Reference rate is SBI interest rate Despite this outperformance over all other asset classes, many still think equities are risky. Yes, it is. But over a short-term i.e. 6 months or 1 year. Risk Graph As you can see from the above graph, the risk is very negligible when you invest for the long term in quality businesses. But if investing in equities was is so easy, why is everyone not rich?

Because most investors commit the below mistakes:

  • They confuse stock price with the business value
  • They chase penny stocks to earn quick money
  • They try to time the market
  • They don’t know when to sell
  • They follow others blindly

Let’s take a look at the best wealth creation ideas for equity investments:

Don’t speculate, rely on empirical evidence

Nobody likes to buy substandard quality products. Research is one of the key elements for wealth creation investing. People often compare equity investing to gambling. This is mainly due to investor’s tendency to invest on the basis of tips. One of the golden rules for equity wealth creation investing is to avoid tips and speculation. For wealth creation ideas, it is necessary to do some research and find good quality stocks that have shown consistency with their performance and have the potential to deliver results in the coming years.

Don’t be a chicken, have a hawk’s eye

Investing in the right stock in the right quantity is important for wealth creation investing. Just like a chicken who eats everything that comes in its way, do not invest in too many stocks that can divert your attention or make it difficult for you to manage. Experts recommend a maximum of 15-20 quality stocks for wealth creation investing.

Don’t time, believe in ‘time’

Patience is one of the key factors for long term wealth creation investing. Successful investing is all about buying the right business and holding it for the long term. As legendary investor Charlie Munger rightly said; ‘Big money is not in buying or selling, it’s in waiting’.

Don’t buy and hold, monitor it

Some stocks in your portfolio may outperform others while some may turn out to be duds. For wealth creation investing, it is necessary to rebalance your portfolio as and when required to ensure that your strategy is on the right track. To summarize, wealth creation investing is more of an art rather than science. Anybody can create wealth by following the above mentioned simple but powerful wealth creation strategies and ideas.

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