Wealth Creators or Wealth Managers? Making the right choice
What is the formula to make fortunes in the stock markets? More often, wealth managers are in pursuit of large returns on a monthly, quarterly or annual basis by capitalising on the daily fluctuations. This investing strategy mostly results in towering churning rates and irrational decisions while discouraging long-term gains.
Making money on a monthly, quarterly or a yearly basis is a short-term process, while the process of wealth creation runs for a much longer tenure.
This makes me recall a riveting conversation between Jeff Bezos, Founder of Amazon, and businessman and moghul Warren Buffett. Bezos asked Buffett, "Your investment thesis is so simple. You're the second richest guy in the world, and it's so simple. Why doesn't everyone just copy you?" To this, Buffett quickly responded, "Because nobody wants to get rich slow."
More often, wealth managers are in pursuit of 20-40 percent returns on the monthly, quarterly or annual basis by capitalising on daily fluctuations. This investing strategy mostly results in towering churning rates and irrational decisions while discouraging the long-term gains. Unlike ‘wealth management’, wealth creation is about purchasing sound businesses backed by rigorous research and holding onto it for a long term.
Also, many investors consider stock price synonymous with its quality. Due to this myopic view, they fail to understand that the stock is much more than the ticker symbol and its market price. When an investor purchases a stock, they are actually making an ownership interest in the business, and the growth prospects of such businesses is hinging on people who are running it. That’s why it is important to unlock the data surrounding the growth prospects, capital discipline and competency of the management before you invest in a stock.
This brings us to the quintessential question: what is the formula to make fortunes in the stock markets? The mantra of wealth creation is simple: investing in a sound business at a price that represents a material discount to its long-term intrinsic value and then allowing the business value to surface over time through ‘Investment Discipline’ and ‘Power of Compounding’. Now, one may ask, if it is so plain sailing, then why is it that only 10 percent of the equity investors are able to make money in the stock markets?
The concept of wealth creation rests on three pillars:
Learning what is ‘relevant’ and what is ‘irrelevant’
It’s not surprising to meet a couch potato investor who is always glued to the stock screens. What he fails to understand is that the news anchor is pontificating every update related to markets, socio-economic data, political developments; whereas, on the other hand, there is a deluge of hot stock tips. A novice investor with a pitcher in his hand is trying to catch all this information. However, not all stock and market information demand an immediate action if you are a long-term investor. Broader economic fundamentals and stock specific analysis need to be conducted before you hit a green or red button on your screen.
Mastering the art of controlling one’s own emotions
More often than not, investor psychology and reaction towards market cycles of greed and fear leading to a series of investment decisions essentially go against the very tenets of wealth creation. Unfortunately, many investors rebuke the volatility of the stock markets. However, it is not the stock market fluctuations, but his own emotions that are his biggest foe. The media hype coupled with emotions transform your long-term investing environs into a gambling den.
3 Ps – Patience, Perseverance and Power of Compounding
The stock market is anything, but definitely not a lottery ticket where you can become a millionaire overnight. The process of making money in the stock market is similar to planting a tree. It needs a few ingredients such as time, patience, and discipline to water it daily to see it grow from a seed into a tree. It is essential to note that wealth is created through “multiplication” and not “merely by addition”. The results will seem slow to come in at first, but persevere. It creates a snowball of money gradually forming an avalanche of wealth over time. Looking back into the past, we have seen a myriad of such stocks such as Eicher Motors, MRF, CEAT, MindTree, Ajanta Pharma which have multiplied by 5-15 times in a span of just five years.
Having said this, how can an investor whose primary concern is long-term wealth creation can achieve his financial objective? Enter the role of Wealth Creators (not to be confused with Wealth Managers). The objective and modus operandi of creators and managers are very unlike. Wealth Creators (your long-term equity advisor) are like your GPS: they will first track your financial state, design a superior tailor-made portfolio, provide periodic stock and market updates, substitute stocks which are stuck in a standstill traffic with better-performing stocks and, lastly, help you not to deviate from your wealth creation journey. With a start to finish guidance on the directions, the complexities, disarrays, incongruity in investing plan and investor’s profile are stripped out.
Like the tortoise that plods along, an intelligent conservative investment will beat out any “high flying trend/stock”– time and time again. There is no substitute for discipline and patience in investing.