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There are many assets and financial products which can help you create long term wealth; this blog will focus on the one that I prefer in my personal long-term portfolio – equity shares.
Buying equity shares or stocks is like buying a small part of a company. This is not just any company or business; it will have to be a publicly listed company and anyone should be able to buy a share through stock exchanges like BSE and NSE.
There are two ways to get exposure, through initial public offerings or the first listing of a company, which I suggest avoiding completely. Businesses make their shares accessible to the general public by way of an initial public offer or IPO and there is a rush to buy these IPO offers. However, I don’t recommend you to invest in IPOs, its best to wait until the share is listed and then buy directly from the secondary market. Buy a share only after it has listed and you have access to more information and analysis of fundamentals and stock price trend.
There are a lot of issues with IPO investing like oversubscription, limited information and disclosures. To top it all, the recent trend in IO pricing has usually leaned towards overvaluation which means you may end up getting allotment at a hefty premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More, leaving little room for future gains.
Also, remember we are not talking about trading, which as I explained in the previous blog is not investing. Firstly, you will have probably as many good days and bad. Trading only gets you so far in a day with the small daily or weekly gains of say +/-1% to +/-5% and to make these small percentage gains relevant you need huge capital for trading, otherwise, the risk is not worthwhile. You will not be able to create wealth in this manner.
Instead, focus on investing, which means choosing companies that can deliver positive earnings growth over long periods or many years. Buy small amounts at a time and keep accumulating for a few months, some investors even accumulate over years. That requires a completely different focus and approach.
Why do I prefer equity shares for long term wealth creation?
- It’s convenient to buy – I can transact online by opening an account which takes a few minutes. Plus, I can sell any time too.
- It’s flexible – I can invest as little or as much. This means I can buy 1 share of a company at a time or a 1000, depending on how much surplus I have to spare.
- It’s easy to track – Prices of stocks are published every day on www.bse.com and www.nse.com
- It’s liquid – Most large and mid-sized company shares are available in plenty; you can put in a sell transaction without much worry about impacting the price negatively.
However, it’s not a simple task. It requires a special kind of effort if you choose to go direct in equity shares and build a long-term investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More portfolio.
From effort to gains
As mentioned above, buying equity shares is like buying a part of a business or company which you believe will continue to deliver earnings in the future. Not only that you have to look for companies where there is an expectation of reasonable growth in earnings too.
Here is a list of some basic analysis you need to indulge in before you are ready to invest in shares.
- You must know and understand the product(s) or service(s) that the company provides.
- You should have some comfort in analysing the financial health of the company through its financial statements like profit and loss account and the balance sheet. The amount of debt the company has, has a direct bearing on its future stock price. Plus, things like how much cash the business generates is important to track.
- You must also be able to estimate to some degree of accuracy, the future earnings growth of the company for a 5-10-year period.
- Analyse whether the company will be able to innovate to retain market share.
- Analyse the potential and quality of the top management of any company you want to invest in.
- Lastly, after all this fundamental analysis, you must ascertain whether the listed market price of the share is reflecting the fundamentals accurately or it’s at a premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More or at a discount.
Only once this basic level of analysis is done can you go ahead with buying a share.
Stocks bought at a high premiumThis is the amount you pay for keeping an insurance policy active. Usually paid in a lump sum at the start of the policy term or annually through the term, it includes all the charges and levies by the insurance... More to their fundamental per share value may fail to yield the returns you are looking forward to. It also means that the earnings growth of the company has to continuously surprise on the upside for your stock price to move in leaps. This may extend your time horizon or expected returns. At the same time, stocks bought at a discount require some careful analysis too. There can be two reasons for the discount, either other investors have not realised its value yet or there is some information they have that you have missed out on.
The foremost thing, as mentioned in the previous blog, is quality. If you get your analysis right and are able to buy into high-quality stocks, you will create enormous wealth in future.
Get the analysis right and wealth creation is simply a waiting game!
|Name of the stock||Price 10 years back (Rs)||Price today (Rs)||Annualised gains (%)||Rs 1 lakh in 10 years (Rs)|
|Asian Paints||263||1780||22%||6.76 lakh|
|HDFC Bank||210||1050||18%||5.00 lakh|
|Maruti Suzuki||1225||6600||18%||5.38 lakh|
|Page Industries||1230||18800||31%||15.28 lakh|
If on the other hand, you get the analysis wrong and the quality of the stocks you bought is not up to the mark, you are also just as likely to lose a lot of money.
Remember equity investing is a high risk, high return proposition. Don’t risk your money in bad quality. The flip side of wealth creation is losing money and it happens more often than you think.
If you don’t pay attention to the analysis QUALITY will suffer leading to LOSSES
|Name of the stock||Price 10 years back (Rs)||Price today (Rs)||Rs 1 lakh in 10 years (Rs)||Absolute loss|
|Yes Bank (peaked at Rs 390 in 2018)||70||15||21,429||-79%|
Not an easy task!
While this kind of analysis may be doable for one or two companies that you are familiar with, building a portfolio of shares requires you to take a view on at least 15-20 stocks. It’s not a given that the first 15 you pick will all be positive tick marks and a screaming buy. You will reject a few before you arrive at the final 15-20 stocks. In my experience, you need to track at least 100-150 stocks, before arriving at 15-20 good ones that fit in your portfolio.
And even for the good quality companies, you have to wait at least 7-10 years before you witness wealth creation.
That’s the second lesson about equity investing, it requires a lot of patience.
The other options
If you risk the danger of under analysing your long-term investments, there is thankfully a way to get the same benefit with reduced risk of lack of ability. This way is through managed funds where professional, qualified and experienced fund managers are available to manage your money in carefully chosen equity portfolios.
This is available through equity mutual funds, equity portfolio management schemes or PMS and through alternate investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More funds or AIFs.
More on this in the next blog. Until then focus on the fact that investing in equity is easy and with multiplying benefits!
Long term wealth creation is a convenient and flexible process when you choose equity assets like equity shares as your choice of investmentAn investment is made to give you a return. You make an investment if you use your money to buy either physical assets like property or financial assets like bonds and equity with an aim to receive income or gains... More. However, doing this all by yourself is not an easy task. It requires a whole lot of analysis do converge the market price with the fundamentals of a company and then decide whether you want to buy it or not. Secondly, if you end up buying shares of poor quality, poorly managed companies, the risk of losing a lot of money is high.
Tune in to the next episode for ways to invest in equity where you can outsource the hard work!
Very good knowledge I got. Guidance regarding Technical chart is necessary.Everybody is talking about this, and what ia algorithm now a days this term is also famous.