THE POWER OF EQUITY
Mohammed Anwar Ahmed, a retired resident of Amalner, a sleepy town in Jalgaon district of Maharashtra, happened to invest in 1980 Rs. 10,000 (half of Rs. 20,000 he had got as his share from the sales proceeds of his father’s farmland) in buying 100 shares of WIPRO (then Western India Vegetables Products Ltd.) from a share broker who had visited his town looking for owners of Wipro’s shares for his clients in Mumbai. He had bought those shares after getting convinced that he could also become a part owner of Wipro by buying its shares. Never in his wildest dreams did he ever realize that these 10000 rupees would make him worth more than 1431 crores one day. This does not include more than rupees 150 crores he has received as dividends since then.
Over the last 42 years, this is how his wealth has grown.
1981: declared a 1:1 bonus. He now had 200 shares.
1985: declared 1:1 bonus. He therefore had 400 shares.
1986: split the share to Rs.10. He thus had 4000 shares.
1987: declared 1:1 bonus. He hence had 8000 shares.
1989: declared a 1:1 bonus. Now he had 16,000 shares.
1992: declared a 1:1 bonus. By now he had 32,000 shares.
1995: declared a 1:1 bonus. He then had 64,000 shares.
1997: declared 2:1 bonus. He now held 1,92,000 shares.
1999: split the share to Rs.2. He now had 9,60,000 shares.
2004: declared 2:1 bonus. He thus had 28,80,000 shares.
2005: declared 1:1 bonus. He came to have 57,60,000 shares.
2010: declared 2:3 bonus. He now had 96,00,000 shares.
2017: declared1:1 bonus. He now has 1,92,00,000
2019 : declared 1:3 bonus. He now has 2, 56, 00,000 shares
2,56,00,000 x 559 (CMP) = 14310400000/- (current value)*
*the value changes with change in CMP
Patience is the key word
On the face of it equity means shares. One makes money by buying and selling shares. One often gets confused between trading and investing. There is a difference between the two. While both works on same the principle, the real difference lies in the time horizon. While trading happens during the same day or within a few days, investing is for a much longer time frame. Again, even in investing, there is short-term, medium term and long term investing. Choice of route depends on the investor’s perspective. It may vary from a few months to few decades. The real return lies in the long-term horizon as we see in the case of Mohammad Anwar Ahmed. A modest investment, (though for 1980 Rs.10000 was a very good amount) gave such an unimaginable return over a period of four decades without any efforts in between. Such is the power of Equity. A patient investor is always rewarded in the long term.
Choice of Stocks
Having said that long term investment is always rewarding, it is equally important to understand that long term investment in Good stocks result in fruitful results. Proper research backed with wisdom would help picking up good stocks which would play the trick in the years to come. Stocks of fundamentally strong companies and of those companies in promising and futuristic industries with future growth prospects would generate stronger conviction of investing in them. If the investment horizon is long enough, short term volatility should not bother the investor. Rather, such volatilities are opportunities of picking up more shares of such stocks. Averaging helps negate the weakness in stocks. The bucket becomes bigger and richer with such accumulations. Apart from guaranteeing stellar returns in the future, such investments also keep rewarding the investors in the form of regular dividends. These dividends provide periodic boost to one’s monetary benefits.
Diversified Portfolio
“Don’t put all your eggs in the same basket”. The same saga should stand true for any sensible portfolio. A good growth oriented portfolio must give utmost emphasis on asset allocation. An investor’s time horizon should decide which assets have to be given what percent of allocation. To have a clear and better understanding of the various asset classes, lets try to discuss them briefly.
Equity funds: These are in the form of shares/ownership in a company. When a company issues equity shares in the open market, people buy these shares as per their interest and capacity and become part owners of the company. Depending on the time horizon, an investor can decide the time for which he wants to hold the stock. Generally, a time span of over 3 years is advisable for a good return as it helps in overriding the short-term market fluctuations.
Debt funds / Fixed Income Assets: Historically, debt funds or fixed income assets have been more popular among the Indian investors by virtue of being less risky. The risk averse investors prefer this type of asset allocation in their portfolio because they give assured returns over a longer period of time, avoiding the market volatilities. Corporate and government bonds, corporate debt securities, money market instruments, etc. are a few examples of this types of asset allocation.
Liquid funds / Cash or cash equivalent assets: This asset class is suitable for those with short term investment horizon. Liquidity is the main advantage of this investment instrument. The investors who do not want to get stuck in long lock-in compulsions and would require liquidity in the near future prefer liquid funds. Liquid funds offer safety, reasonably good returns and the investor has the flexibility to redeem any time. Cash equivalents like money market instruments, commercial papers, treasury bills etc are some of the popular options in this asset class.
Real estate / REIT property: This asset class is primarily investments in physical space like a real estate property, building, and apartment. Such properties are tangible assets and give real time ownership feeling to an investor as against the virtual form of other asset class.
Gold funds: Gold has been a time-tested and safe investment haven for risk averse investors. Moreover, gold provides a hedge against the market volatility and for that reason even aggressive investors prefer to allocate a part of their investment in such asset class as a cushion.
Investment Strategies
Different factors like growth, value, income, purpose etc. are instrumental while deciding the strategies for investment. The asset allocation in various instruments must be tied to the investment strategies, which must be meticulously planned. The growth potential of a particular sector, the macroeconomic situation of the country, risk appetite of the investor, knowledge of the market dynamics are very important indicators which must be considered while chalking out investment strategies.
Performance
Equity has always performed better than any other asset class in the long term. It gives stellar returns, if given time. Having said that it is equally important to keep a watch on the performance of the individual stock. Simply investing in a particular stock does not guarantee big returns. Many stocks lose steam for a variety of reasons. The said company may not be performing well or may have run into rough weather. That would eventually affect the performance of the stock. Instead of appreciation, the stock may also erode the investment. So it is imperative to keep a watch on the performance of the stock from time to time, even if they are bought with a long term perspective.
Final Words
Well researched, well thought prudent investments are necessary for a comfortable and secure future. A basic understanding of the various asset classes, chalking out careful strategies, cautious approach backed by luck go a long way in ensuring that the journey with equity bears fruits which are healthy, nutritious and immunity boosters.
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