원문 보기
What is the surest way to build wealth over the long term ? This is a question I think everyone asks themselves at some point. Absolutely. So today we are delving deeper into this question. We have some great sources. Jeremy Siegel's classic book. Stucks for the long run. Then there are some articles on Benjamin Graham, the father of value investing.
There is also the concept of economic moot. Yes. And there's also some very interesting analysis on compounding and the valuations of the Indian market. And our aim is to combine all these and create a strong structure. We will not only talk about what to do but also why to do it and most importantly how to think.
Ok. So let's get started. And our story begins with a very interesting and perhaps most ill-timed piece of advice. Yes, this story is amazing. The year was 1929. Just before the biggest crash in the history of the US stock market. A big executive named John J. Raskob said in an interview that if one invests just $15 every month in the shares of good companies, one can make $80 in 20 years.
And as can be expected, Raskob's advice was widely ridiculed when the market crashed just a few months later. It was considered a symbol of the stupidity and greed of that time. Absolutely. But here's what Jeremy Siegel does in his book: a wonderful analysis. He asks what would have happened if someone had actually followed the advice of the prince?
I mean, I could have ignored that joke and continued investing $15 every month with discipline. Absolutely. And Siegel's data shows that if an investor were so courageous and stayed invested for the next 30 years, their returns would have been much higher than those who had kept their money in government Treasury bills, which are considered the safest.
Wow, despite starting investing at the worst time in history, stocks still outperformed in the long term. It clearly shows what you are investing in. This is probably more important than when you are applying it. This brings us directly to the most powerful principle of investing. It is said that even Einstein called it the eighth wonder of the world.
Compounding or compounding. Yes. It's not a complicated concept, but the results are magical. A very simple example of Ram and Shyam is given in one source. Both of us invested ₹1 lakh for 10 years at 10% interest. Shyam chose simple interest and after 10 years he got ₹ lakh including principal and interest.
It is an easy calculation. And Ram chose compound interest. Yes. Ram chose compound interest. Where you get interest not only on the principal amount but also on the interest earned. Good. And after 10 years he had around 2.6 lakhs. This difference of ₹60,000 is the power of compounding and this power increases exponentially with time.
I saw in a chart that if ₹1 lakh is invested at 10% , then in 5 years it becomes ₹16 lakh which is decent. But in 30 years the same amount becomes Rs 1.74 crore. This is unbelievable. And it's not just theoretical mathematics. Jeremy Siegel's 200 years of historical data proves this. From 1802 to 1997, US stocks averaged a real return of 7%, even after adjusting for inflation.
7% hmm even after inflation? Yes, and at this rate, $197 invested in 1802 had become about $7.5 million. This is the combined power of time and compounding. Ok. So the mathematics of compounding is amazing. But this only works if the returns are consistently positive. Isn't it? If someone had invested in, say, the Japanese market 30 years ago, where the market remained at the same level for decades, would compounding still have seemed so magical?
This is a very important and valid question. You are absolutely right. For compounding to work, it requires an economy that is growing over the long term. The case of Japan is an exception. But it teaches us that investing all your money in one country can be risky. So, diversification is necessary.
Absolutely. But if we look at developing economies like the US or India, the long-term story has been one of growth. So if the long term trend is so strong does that mean that thinking about when to enter the market is pointless, which is called market timing. One source explains this very well with the example of four types of investors.
Suppose there are four friends. Ok? The first is Perfect Paula, who somehow magically always invests at the market's lowest point. The second is Steady Sam who is disciplined and invests a fixed amount on the first of every month. Whether the market is up or down. Most of us are probably like Steady Sam.
Yes, the third one is unlucky Uma who always invests money at the peak of the market i.e. at the highest price. And the fourth is Cash Charlie who keeps his money in cash out of fear. Ok. Now, 20 years later, when the results were seen, Charlie, who had the cash, was at the bottom. Inflation had eaten up his money.
But the most surprising thing was that there was very little difference in the returns of Perfect Pola and Unlucky Uma. Good. There was n't much difference between the best and worst timers. very slight. And Stay Sam's return was also very close to him. The lesson is quite clear. As they say, time in the market beats timing the market.
Timing the market is far better than trying to time the market. At once. Ok. So it is important to stay in the market for a long time. But this does not mean that we should blindly invest money in any company. You will have to choose. Absolutely. This is where Benjamin Graham's thinking comes into play.
Yes. Warren Buffett's mentor, Benjamin Graham, explained a very basic yet powerful difference. The difference between an investor and a speculator. We Graham had a simple rule. Investment is something in which, after thorough research, you can say that your principal will be safe and you will get a decent return.
If we don't guarantee this, you are betting. This sounds very logical but when the market is fluctuating every day, it becomes difficult to maintain this difference. I love that Mr. Market idea of his. That is his most brilliant metaphor. Isn't it? Yes. Graham says imagine you have a business partner named Mr.
Market. Hmm. He comes to your office every day and tells you a price to buy or sell your shares. We but Mr. Market is very moody. Some days he is very happy and optimistic and prices your shares ridiculously high. And some days he is very scared and pessimistic and is ready to sell those same cities for a pittance.
So what should an investor do? Graham says you don't have to be influenced by his mood. He is there to serve you. Not to show you the way. Good. When he is very scared and is offering you a low price, it is your chance to buy and when he is very greedy and is offering you a very high price, it may be your chance to sell.
Instead of getting carried away by the market fluctuations, you have to take advantage of this stupidity of Mr. Market. So we understood the mentality. We have to think like an owner. Not like a bookmaker. The key is to take advantage of Mr. Market's mood. But what are we actually buying? We are buying a stake in a company.
So how do we know which company is strong and will last long? This is where the concept of the economic moat or economic mode, popularized by Warren Buffett, comes in. This is a great idea. Economic gap. Yes. Just like in ancient times a deep moat used to protect a fort from enemy attacks. We likewise an economic moat protects a company from its competitors.
Wow, this concept of economic gap is amazing. Meaning an invisible wall that protects the company. So what is this wall made of? What forms can it take? It has many forms. And it is very important for an investor to recognize these. The first and most powerful is the network effect. Like Zomato in India or Facebook in the world.
Absolutely. The more people use them, the more valuable and stronger they become. It becomes almost impossible for a new competitor to break into this network. Ok. This made sense. The second would probably be brand strength. Like people are willing to pay more for Nike shoes. perfect. We call this intangible assets.
This includes things like brand recognition, patents or government licenses. The name of the cola is its taste. And companies selling goods at low prices like DMAR in India or Walmart in America, this is the third type of gap. Cost advantage. Due to their large scale, these companies are able to sell goods at such low prices that it becomes difficult for smaller competitors to survive.
Another thing that comes to my mind is when it's very difficult to leave a service, like changing your bank account or leaving the Apple ecosystem. Very sea. This is called switching cost. When it is too expensive, time-consuming, or inconvenient for customers to leave one company's service and switch to another, it becomes a company moat.
The last one is the efficient scale. This happens in markets where there is only room for one or two companies. Like the electricity supply company in your city. Or the airport. Yes absolutely. Building another airport is not economically viable. And to understand these trenches, we also need to understand who the enemy is.
Meaning who are the competitors of the company? One source mentions direct and indirect competitors. Yes, this is an important distinction. The direct competitor is clear. Hyundai is fine for Maruti. But indirect competitors are those that are drawing your customer’s attention or money to something else.
For example, Netflix is an indirect competitor of a cinema hall. We're both competing for fun. Ok. So we figured out how to have a strong mindset and find a good company. But now let us come to the question which is probably in everyone's mind today. The market is near its highest level. There are voices from all sides that the valuations are too high.
Should n't one be afraid to invest in such an expensive market? This fear is natural. And this is where another principle from Benjamin Graham helps us. Margin of safety or margin of safety. We simply mean buying something at a price lower than its actual value. So that even if your guess is wrong, you have a margin of error.
But for a long-term investor, sitting out completely out of fear of market valuations can be a big mistake. One source had some very interesting data on this about the Indian market. Yes, that analysis looked at Indian market data up to June 2022. At that time, the PE ratio of Nifty 50 i.e. price to earnings ratio was 20.2, which was slightly lower than its 15-year average of 21.9.
Meaning the market did not seem very expensive. No, but the most surprising conclusion of that analysis was something else. He observed that even on occasions in the last 15 years, the PE ratio was very high. Above 24 which is considered very expensive. Even then, if someone invested, his average return over the next three years would have been 10%.
Well yes this again proves the same point that if your investment horizon is 5, 10 or 20 years then entering the market at high valuations is not as disastrous as people think. And this is also completely in line with Jeremy Siegel's analysis. He showed that people who invested at the peaks of the market, such as in 1929 or 1966, even after 30 years had more money than they had invested in bonds and bills.
Absolutely patience is the key. So if we sum up this entire discussion today, what is the main lesson for an investor? I think the first and biggest lesson is that historical data screams that stocks are one of the best options for building wealth over the long term. Secondly, the real power of this game lies in the combination of time and compounding.
You have to give it a long time to work. The get-rich-quick scheme is gambling. No investment. Third, adopt an owner's mindset. You are not buying shares but a stake in a business and don't let Mr. Market's daily moods influence you but take advantage of his stupidity. Fourth, look for companies that have a strong and sustainable economic moat.
A trait that would keep them afloat for years against their competitors. And finally, don't get scared by the market noise and high valuations. If you have a long-term view, staying in the market is more important and beneficial than waiting for the right time. And one last thought with which we can end today's conversation.
This comes from Jeremy Siegel's book itself. We've talked about ways to build wealth, but what happens when an entire generation of American baby boomers tries to sell all their assets at the same time to fund retirement? We have this as a big question. Who will be the buyer of these assets worth trillions of dollars?
Could this lead to a major crisis in the market ? So, what could be the answer to this? Siegel believes the answer probably lies in the growth of developing countries like India and China. While the Western generation will be selling, a new young and wealthy generation in these countries will be buying. Good. This could create a new global investment dynamic in the next century.
Comments 0