We often hear people who have invested in equities sharing either their success or painful failure stories. While successful investing may put smile to your face, huge losses in equity can bring tears to your eyes. Before blaming it all on the volatile nature of equities, read this dialogue to get a clear insight into equity investing.
Knock Knock!
Me: Who is it?
Equities: Equities.
Me: Why me? I'm not interested?
Equities: Are you interested in money?
Me: What kind of a question is that, everyone is.
Equities: Then you don’t have a choice but to talk to me!
Me: I'm not very fond of you. You destroy money.
Equities: No I don't, it is you who destroys money. I create money.
Me: How is that possible? I had a brilliant portfolio and now it's only worth 50 per cent.
Equities: You misunderstand me. I always create wealth and that is my job. Let me ask you a question, what job do you do?
Me: I'm a programmer, working in an IT company.
Equities: Now tell me do you work every day with the same enthusiasm, same energy level, and same commitment without the slightest of difference. Is each day of your life absolutely identical?
Well, I don't think so. The same applies to me. Each day is a bit different from the last one. Further, whatever you were earning say five years back, do you earn the same money today? Again, I don’t think so.
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So you do not do your job consistently well and sometimes work with almost robotic precision, you are still not a failure. In fact, you are earning more than what you were some years ago. You have been promoted in the process. Besides, over the years you have taken up new assignments, new jobs. Thus the net result is that over a period of 5-10 years of your working career, you have been quite successful. So, when I consider your performance over 5-10 years it's obviously quite good. In your working career, you might have got handsome bonus and may be sometimes no appraisal! But the fundamental thing is you did not stop working and using the skills that you are good at. Isn't that right?
Me: Yes, so?
Equities: The same applies to me.
Me: What do you mean?
Equities: It's quite simple. Each day is different, sometimes good sometimes bad. That's what you call volatility. Look at my performance over a 5-10 year time frame and now compare it with your working years. I have still generated far more than what you would have earned via your public provident fund or bank deposit. The average is about 12-15 per cent per annum.
Me: It sounds good but I don’t understand how it works.
Equities: Alright. How do you feel when you buy a part of me in various forms like direct equity, index funds, structured products, mutual funds, unit linked insurance product? Is the feeling same as buying a diamond necklace or do you think you have bought something like a pen, paper or fruit?
Me: That is absurd? You cannot compare an asset with a commodity.
Equities: Of course, it is comparable and too a perfect one! Would you buy cheap and fake diamonds and pay price of real diamonds? You consider that as an asset and keep it for many years and not look at it each day, isn't? That's exactly what you should be doing with me.
I am an asset and not a commodity that you ride on for a while and when you are done with, you chuck it away. I can be your lifelong friend but the problem is that there are many, who are my look-alikes. Don't be fooled by them. Choose my best forms, add a little of these forms in your portfolio. I have many names like Infosys, ITC, Grasim, etc. stocks. Find out which of my names has a good profit margin or simply good performance record. Only then indulge in buying me, and trust me I will never disappoint you. Isn't that simple?
Me: Sure. It sounds great.
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