(This appears in yesterday/today editions of Deccan Chronicle. http://epaper.deccanchronicle.com/articledetailpage.aspx?id=10269023
Most of us who want to buy stocks for the first time want that unknown small company which will make our ten thousand in to a crore… What are the odds? Read on…
I come across many requests for ‘tips’ or ‘recommendations’ for investing in shares. There are two categories of people who just ask. One is the type who have not invested in direct equities. The other ones are the seasoned ones, who are in search of new ideas. Let us leave aside the second category for now.
The first timers are interesting. Many of them have heard stories, read the news and are generally up to date with most headline financial news. Some of them keep trying their luck at applying for IPOs and when they do manage to hit the button, sell it on listing. If they have made a gain, they are happy. If the stock shoots up after they sold, then the story is never told.
Many of them walk up to me and ask me to give them a couple of names for investing for the ‘long term’. Naturally, it has to be such that the price should only go up. And since they think I am an ‘expert’, the stock should do far better than the market. They are conditioned to think that only penny stocks or low-priced stocks can be the recommendations.
I tell them that if they are making a beginning, they should start off with well known names like HDFC, HDFC Bank, Kotak, Cummins, Bajaj Auto, Hero, Nestle, Levers etc. Their response is that “oh, that is too well known, you should be able to tell me of a small stock that will grow”.
If you are a first timer, you should stick to well-known names. Pick a product that is familiar to you. Your daily use tells you which companies are popular and touch your life regularly. These may be well known, but they are also good and safe havens for your wealth. Most of them deliver excellent returns and you are unlikely to do worse than the market, over time. Of course, if you could pick a basket of five to ten names you like, I would urge that you do a SIP in those stocks for ten years. You can keep increasing the allocation to SIP as your income grows. This kind of a portfolio will create a solid bundle of wealth for you.
If I give you an unknown or lesser known name, it is only a ‘potential’ that is being given to you. In today’s world, there are more number of analysts per stock than there are investors. Everyone with a computer and internet seems to be talking shares, earnings, multi-baggers. The flows in to equity have never been so strong and it can only go up from here. Discovering new ideas is an extremely tough ask and the risks are very high. The best money can be made only if you spot a company that will go on to become one of the top three or four in any industry. Here, there is a lot of luck also involved. You would have been lucky to pick a Symphony instead of a Maharaja or a Hotline. There is always an element of luck in picking. And the one who you think has made 100 X from some stock, must have put his moneys in to different stocks. His winners get talked about. No one talks about the ones that did not make the grade.
You have to first secure your wealth with solid assets where preservation of capital is needed. Smaller names can be picked up with money that you can afford to lose without batting an eyelid. And to make big returns, it is not enough if you put some Rs.10,000 rupees in to an idea. You have to commit significant amounts to make real wealth. Here, do not forget your compound arithmetic. Let us say, that the stock market gives us an ‘average’ return of 15%. Suddenly we read that HDFC gave a compound return of 29% over 27 years. Do you realise the significance of this? Let me give you a small table with 30 year returns…
Let the ‘power’ of compounding sink in. Cut this out and stick it on a wall. If you put aside a sum of a lakh of rupees and just forget it for thirty years, this is what it would be, at the end of the thirty year period, at different rates of return:
When the return increases from 10 to 15 percent, the final value is nearly four times. Thus if a quality company grows its profits at around 15 to 20 percent per annum, it is reasonable to expect that the share prices will also do likewise. Thus, when you have reasonably good comfort in well-known names, what would you choose?
When there is a simple solution, why do we complicate things?