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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