Why ‘getting rich slow’ matters
This column has often quoted Warren Buffett’s philosophy on wealth creation. It is time to remind you of that anecdote again. When asked about people not using his investment style, Buffett said nobody likes to get rich slowly. Jeff Bezos, the founder of retail giant Amazon, asked him the question.
The latest data on the trading activity triggers this note of caution. Many of you who are into investing are using derivatives like futures and options. In a recent conference call, Angel One, a listed stockbroker, told analysts that F&O continues to drive gross broking revenue, contributing 85% in the second quarter of 2023-24. The cash segment contributed only 11%. That means most clients prefer speculative transactions in the derivatives market over long-term investment transactions.
When you say ‘you invest’ in the stock market, it does not mean daily trading in stocks or derivatives. It means buying and holding to that investment for a long time and letting it grow. Warren Buffett has created wealth for himself and his shareholders by choosing fundamentally solid companies and staying with those investments. He has also advised individuals not into finance to regularly invest in a simple index fund and stay invested for a long time to create wealth.
If you understand the stockbroking business, you will know that their profits do not depend on whether you make money or do not make money. They generate revenue with every trade that you make. It is also not a problem trading in derivatives when you know the risks associated with trading in the stock market. If you are in it for the adrenalin rush and willing to sustain losses, the decision is yours. However, if you want to create wealth for yourself and secure your financial future, you need to pause. There are many things you can do and not do in the stock market.
Things you can do
You must read a lot. If you are a regular investor in the market, a lot of financial literature is available for free. It is available on websites of the Reserve Bank of India, the Securities and Exchange Board of India, stock exchanges and the press. Companies announce quarterly financial results and publish annual reports and transcripts of their calls with stock market analysts. There is a lot of other material your stockbroker may send out. You need to keep on top of significant developments that affect your investments. Anything that affects the future profit of companies affects share prices. That includes the inflation trend. It influences interest rates that hurt equity asset prices.
If you are new to investing, you must work with a professional financial advisor. So, if it is not possible for you to read regularly, you need someone else who can do that for you. A fundamental thing to know is that equity investing is about giving your investment the time to grow. You can actively do it by buying and selling shares of fundamentally strong companies. The other option is to remain a passive investor by owning a combination of index funds and mutual funds. Your financial advisor can help make an appropriate asset allocation.
Things not to do
The most important thing to not do is invest in something you do not know. Just because someone else made some quick money in low-priced but risky stocks or derivatives, you should not jump. There could be downsides to such investing due to differences in the risk appetite. You can risk your money only when you have a lot of it in your bank or are confident about your future income.
The other important thing is not to panic when markets turn volatile, or there is panic. If you know you are investing in solid companies, you should never withdraw your money. Those who stayed invested after the crash in the stock market during the COVID-19 pandemic and did not panic have managed to more than triple the value of their investment in just three years.