Will buying shares make me rich?

The media keeps telling you stories of how investors got rich. I have carried an article saying ‘If you had invested Rs. 10,000 in Wipro it would be worth a serious amount today’, right? So all of you investing in shares are expecting to get seriously rich, are you?

Well partly yes and partly no. When you buy shares in the secondary market you are not “investing” in the economic sense of the word.  You are not spending for future production. You are not setting up a business, you are not buying a factory, you are taking a very different type of risk. In fact what you are doing is very, very important – you are reallocating capital. You are selling the shares of a company not doing well and buying shares of a company expected to do better. Hey, you are still not investing. The company in which you have invested does not even know you.

The people who get real rich are the ones who build their own SUCCESSFUL businesses. Like Warren Buffett, Uday Kotak, Nirmal Jain, – they took risks and built their own businesses with their own money. In the process the shareholders also got rich. If you were an early shareholder, you could have got rich. The later shareholders did not get that rich, did they?

“Going public” and listing their shares on an exchange gives the firm access to funding, but it also gives the owners an exit from what was their real investment. TCS did not need money when Tata Sons decided to do a public offer. Government of India wanted to cash out on the Maruti story which they built using a lot of ‘unfair’ government advantages. You just helped in their reallocation of their capital. However, you got rich too.  These owners spent for future production (made real investments by building a productive asset) and were exiting from their investment on the secondary market.  You were re-allocating your savings into what was really someone else’s investment.   By the time the firm has achieved the growth necessary to be listed on a major public secondary market that its owners are wealthy.  Have a look at the Forbes 400 wealthiest – the people did not get rich buying shares.  They built companies, built real goods and services over a long period of time. This is true of Vallabh Bhansali and Rakesh Jhunjhunwala too – the initial capital to invest had to be earned, and a nice business built – merchant banking, portfolio management, whatever.

Take the case of Icici Prudential Life Insurance. Who REALLY took the risk? the shareholders of Icici bank. Who got rich? the employees of Icici Pru Life. In an indirect way maybe even the shareholders of Icici bank, but largely it is the ‘investors’ – the early ones – and the employees who got rich for ‘taking the risk’ of holding on to a well paid job where esop was the icing. Will you get rich by buying the shares of I Pru Life? My bet is no. The starting point for the richness race is set too far behind for you. You cannot.

Its  convenient to view the purchase of stocks on a secondary market as the place where you “get rich” or where you “invest”.  On average, the stock market generates a real, real return (that’s the after taxes, fees and inflation return) of about 6% over the long-term.  So, if you’re a young aspiring “investor” who buys the sensex for Rs. 100,000, you can expect to have Rs. 500,000 or so after 30 years Not exactly the “get rich” plan, right? But that’s the idea that is continually pounded into our heads through various media sources – this myth that the stock market is somewhere where you get rich. Stop believing that a middle class / lower middle class person is going to get seriously rich by investing Rs. 5000 in a sip for 30 years. No, it will not make you rich. In fact most of the time when you buy a share you are trying to make a claim on assets that have ALREADY made a Nirmal Jain, Uday Kotak, or a Deepak Parekh rich. Real rich.

We can read articles and hope that a SIP will make us a Buffett. It will not. You are more likely to become wealthy investing in yourself. In your own ability to generate future cash flow by creating goods and services than you are by buying an asset that was actually someone else’s wealth creation tool.

However, it will do something else for you – if it is done well under good guidance (paid, or learnt well) it will help you meet all your goals, and retire gracefully and peacefully.

For a person from a poor/ lower middle class family, that is huge. I am not joking, I’m being dead serious.

 

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13 Responses to “Will buying shares make me rich?”

  1. Excellent post!

  2. But there are stocks that go up 10 to 100x from one’s entry price.

  3. Good One, as these days media is selling dreams based in SIPs.

    One think I would like to ask, why are you after ICICI Pru, I have seen many times you writing that this stock would never make money for its investors. India is highly under insured, plus there is a lot market share waiting to be taken away from LIC, I see opportunity for private sector…

  4. Every word is true..

  5. Good article, but this left me with open ended questions.

    1. So, according to you which is a good option to invest other than shares/SIP.

    2. “Good guidanace to meet our goals” – could you please share any reference which you have, it will be great help.

    Thanks

  6. A true eye opener. I was thinking a SIP can make someone rich based on the ‘n’ factor – time in the market.

  7. Subra sir , you disappointed me with this post. I have been investing in mfs with a long term (15-20 year) perspective with the hope that it will make enough money for me to retire. Looks like it’s not going to happen 🙁

  8. Good post from a entrepreneurship view. The article revolves around how you will be better off if you invest in yourself.

    Stocks and MFs will not give you exponential returns in the long run But returns ranging from 7 to 16 percent is ideally the expectation, anything more is just an icing on the cake.

    Planning should revolve around conservative return numbers but you should be aggressive when in comes to investing in yourself. The returns will be manyfold.

    Great blog.

  9. An individual’s definition of ‘rich’ almost always differs from another. What does one want to do with the accumulated wealth? For early retirement? Chidlren’s education stateside? Exotic vacations? Leave assets for the next generation? Have enough deposits to survive on the interest on the interest?
    There is no need to abandon hope by realizing the we may not be in the top 0.0001% of the population making it big entrepreneurially.
    Can’t one hope to become wealthy by “Goal-based investing”. Your words, not mine!

  10. @Abhay
    If the math behind your investments is reasonable, why wouldn’t it work?

  11. the simple rule of “stock” investing is in secondary market is we all are secondary.! let us take an example ! 100 rupees as a company ,30 rupees will be from owner .this is equity.70 rupees will be loan(liability) . 70+ 30=100=ASSET!(equity plus liabilty(loan)=ASSET!.. next the owner will be earning profit 130 from 100 .he takes the 130. ok? he already got his 30 rupees! ok?AND A PROFIT OF 100! next he goes to public issue and sells his equity at 1000 rupees! you and i are buying his 30 rupees part at 1000 rupees plus the loan of 70 rupees!you are not buying 100 rupees asset! you are just buying A TINY PART of equity AT A VERY VERY HIgh PRICE! and funny is the company if it makes profits ,all the money goes to repay the loan!(remember the 70 rupees part) you get nothing! PLEAsE BE AWAY FROM SIP! EQUITY! IF you dont understand this! SURENDRA 0811332129612755

  12. Immature article to say the least. Can’t investing in stocks and investing in oneself go together? Does doing one thing prevent you from doing the other? Agreed that investing in Kotak bank is not going to make you fabulously rich, but the time to invest in it was 15 years ago (when it was quoting at Rs.3, adjusted for splits and bonuses). So look for tomorrow’s Kotak today. Contrary to what is said in the article, it will make you rich and some more

  13. buying a real estate or investing in gold or investing in stocks! basically is like marrying “somebody” wife! already that “fellow”had a honeymoon,used her, delivered 2 children! and now “you are buying her ” at a “premium”! hoping she will make you “rich”! this is the simplest explanation!

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