Investments- the point, vices and virtues

Abstract Jun 29, 2020

The above image speaks a lot about the power of investment. Investment is nothing but the act of putting money, effort or time into something to make a profit or get an advantage. Investment can be understood as ‘consider your money as your employee and making it work for you’. “But investments are risky, you can lose your money. It’s better you save it your in your safe” heard these warnings? Than have a look to a short conversation between two great entrepreneurs. Once when Jeff met Warren he inquired, “Warren, your investing strategy is so simple. Why doesn’t everyone just copy you ?” to which Warren replied,”Because nobody wants to get rich slow”. The vital ingredient for getting rich is patience. It is rightly said that “Money is not built by building saving accounts, but by investing it.” Saving your hard earned money is necessary. It provides a safety net in case of any emergency but if you want to see yourself as a future business tycoon, the next who’s who, a successful entrepreneur or even a family man with a stable financial situation than only savings your money will be like building a house of cards. Warren Buffet said “I made my first investment at age eleven. I was wasting my life up until then”. The reason why investment is necessary is ‘inflation’. Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over some period of time. In layman’s language inflation is nothing but increase in prices. For instance, consider a toy which costs 100₹ today will cost around 105₹ next year(considering India’s average rate of inflation). No matter what happens, you have to increase that 100 bucks to 105. In short, saving your money which doesn’t return you more than rate of inflation is equivalent to losing your money.

Some common myths about investment:

(1) Bank FD’s are reliable

Since, now you have understood the importance of investing money, the first thing that would come to your mind is FD(fixed deposits). It is the most safest way, isn’t it? On an average an Indian bank returns you 7-9%. That’s a good amount right and that too with a low risk. The reality is different. There are various deductions. If you are generating interest more than 10,000₹ per year through FD, than 10% from the interest generated gets deducted as taxes. And in addition to this, inflation is also to be reduced which is 5%(4±2%). So, the net return you get is only about 2%. Return is directly proportional to risk. In banks, risks are low and hence less is the return.

(2) Share market are risky.

Mark Zuckerberg said,”The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” The reason you come across people complaining that share market is scam or it depends on your luck is because of their lack of dare to take risk and impatience. Share market is a platform to invest for long term.

The above is a graph of Nifty50’s performance. To understand that why patience is necessary in stockslet us consider a case study. Consider two freinds Sam and Harsh. Both of them invested same amount of money in Nifty50 in Dec 2007. Soon after 1 year, market was hit by recession. Market went down, economy was dropping down drastically. Both of them got panicked. However Sam was smart and kept himself calm. Under frustration and fright of loosing money, Harsh withdrew all his money with a huge loss. Gradually things were on line, and graph was incrementing linearly. And after a long-lasting wait of ten years in the year 2018, Sam sold all his equities with a great profit. There are many ups and downs but overall the graph increases.

Conclusion:

At the end I would like to say, investment is not the only way of increasing assets, but it plays a major role in multiplying your wealth. Whomever you consider, Jeff Bezos, Warren Buffet, Bill Gates or Elon Musk, they all used the power of money to multiply itself.

Books recommended: Rich dad, poor dad : https://amzn.to/3hBGKFX

The richest man in Babylon: https://amzn.to/2ChN2KV

The intelligent investor: https://amzn.to/2ChuZoa

The Warren Buffet way: https://amzn.to/2YI5X97

-Vatsal Doshi

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