In an address at a Wealth Creation Summit, veteran investor Mr. Ramesh Damani stressed the essential step of saving early in life. He described how prudent investing behavior could turn an amount of Rs 10 lakh per year into a mind-boggling Rs 100 crore within a span of 30 years.
While the mathematics of this calculation seemed simple, the underlying factor remains that these assets needed to be invested in businesses that could double your money every three years, with your portfolio growing at a CAGR of 26%. Equity stands out as the best investment for substantial gains against fixed deposits or even gold as a wealth creator. But, even considering a 40-year period of investing, that is since the base of the Sensex, over those last 40 years (in the period from 1979 to 2019), the Sensex gave a compounded annual growth rate (CAGR) of 16.1%[1].
While each investor’s journey will differ depending on his or her risk tolerance, suitability, and investable surplus, one thing that must not be overlooked, and which has been identified as one of the most important factors in long-term wealth creation, is the vision toward setting an aspirational corpus target.
While embarking on our investment journeys, we can build awareness on the following factors:
Where are we in the cycle?
The markets are cyclical, and every asset class has its growth and lull period. To gauge where we stand in the cycle would help investors better decipher their investment strategy. The major stages in the market are expansion, peak, contraction, and trough. These cycles could range from periods of months to years. In the twists and turns of these cycles, investors tend to get emotional about their investments and make hasty decisions that lead to likely losses. Fear of losses often steers investors to convert their notional losses into real ones during periods of contraction or trough. The fear of missing out, greed, and sometimes herd mentality often encourages investors to buy high and sell low, which is the absolute opposite of the tenets of the stock market.
These common investing blunders occur as investors are guided by emotions more than rationale. The fundamental comprehension of where we stand in the current market cycle should give investors enough data points and clarity to ensure they invest in the right avenues and more so at the right time. Timing matters!
The right entry point
The most significant money is made when a bear market nears its end and a bull market begins.
Are We in a Bull Market or a Bear Market? By rule of thumb, rising prices (like a rise of 20% or more from a bottom) signify that we have officially entered a bull market. The reverse defines the prevalence of a bear market. The timing of entering an investment determines its future gains. While deciphering the stance of the market cycle is essential, timing is critical too.
So essentially, while one can foreknow the somewhat cyclic nature of the market, the absolute returns from them cannot be predicted. So, how else can an investor meet that 100 Crore mark?
Effects of Time and Compounding
Over time compounding maximizes the earning potential of your investments.
When it comes to investing, the power of compounding may be invaluable. The magic of compounding works by exponentially increasing your money. It adds the profit gained back to the capital and then reinvests the total amount to speed up the return earning process. The sooner you begin investing, the harder your money will work for you. However, because compounding potentially works well with time and reinvestment, you should keep the principal and earnings invested for the long term to reap the benefits of compounding.
Holding for the long-term
The challenge lies in patience.
Investors often lack patience, and hence investing for the long run becomes a herculean task. Imagine investing in multi-baggers for long periods that offer constant growth over the long run; once the effect of compounding kicks in, investors will automatically see their corpus grow exponentially. Mr. Damani described his secret sauce of investing in finding the right businesses to invest in for the long haul. He invests in stable organizations that can double his money every three years, the compounding effect of which can give investors the 100 crores they aim for in 3 decades.
An investment in businesses with strong leaders at the helm who focus well on corporate governance with a long-term view for the business is likely to be investments offering steady yet good returns.
Do you believe quality companies held longer can create alpha over timing the market?
Are you riding the current waves alone, or are you in for the long haul?
What is your investment strategy?
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