What is the key of success in Stock market? Why do most people fail in Stock market? Power of compounding is the key of success in Stock Markets
Posted by Manoj Singh ( TB )
July -09- 2022 15:45 PM IST
Hope this helps. Don't jump into share market with greed of money, this will totally bang you badly.
Lot of people ask me as to how good a share ITC is? or Britannia is? Should we go for mutual funds? Please tell me the name of that share where my money will get doubled quickly? Also suggest me a good trading telegram channel etc etc.
Your real story in the Indian stock market will begin only after you survive this mess for 10 years. Therefore, anyone who is luring you for trading and telling you that you will double your money quickly in weeks or months is making you to bank on your luck 100% and not prudence. See I am not saying that every trader is right or wrong but what I am saying is that the people who actually make wealth are seldom traders. As there is a clear difference in the way of thinking.
Just one example, a few thousand rupees in a company known as Wipro around 40 years ago would have turned in several, several crores using the word several here twice is not an error, you can do the mathematics of the stock rise of Wipro since its inception by your own self, similarly, HUL, Asian Paints among several other companies have given returns more than 4000% returns. Trust me Asian Paints since inception has given around 25000% returns.
So then what is the problem?
The problem is that people are not aware of the real power of compounding. No one is willing to wait and actually become rich BUT most of them just want to turn their Rs 100000 into Rs 500000 quickly. That is why most of them fall in the trap of F&O and Swing trading and obviously get wiped off from the market in no time. As trust me aiming for quick returns in no time is simply against the nature of investing and compounding. I can give you numerous examples of the same. Mr Buffett, Mr Ram deo Aggarwal, Mr Rakesh Jhunjhunwala among others none of them have turned into billionaires by doing trading. So, be clear just like Rome was not built in a day. Similar is the concept of investing and compounding.
Finally, if you endured reading this content till now, let me tell you I am a very humble value investor. I am not a trader, also I sincerely have no tricks to multiply my money quickly.
So the question is that what should be your strategy to invest in such a scenario?
If you ask me, to get sure shot success in the stock markets, please first give up your greed and the idea of making money quickly. As I said it is nothing but a change of mentality which you need. Now trust me you will beat the very best trader in the long run with ease.
BUT
You see ads on TV saying that :
“Mutual funds sahi hai!” (Mutual funds are correct!)
So what is the reason?
See, this is a big cycle. You have to understand it indirectly. For example Mr X pays to Y and asks him to promote his fund. Then Y promotes the fund and people rush in and invest in the fund.
That is why you see these ads all over that mutual funds are great and all but when you look at the actual returns trust me you can earn much more by just having the basic knowledge of this world of stock markets and having discipline of epic levels.
Now just google any mutual fund right now, any fund and you will see that most of them have only at max 4–5% exposure in one stock. Therefore say a mutual fund scheme which manages Rs 100 will never put more than Rs 3 to 4 on one stock. This means that their exposure at all times is rarely aggressive.
This teaches us that the bold words discipline of epic levels which I have written means that you are not required to love one or two stocks, you are also not required to get emotional i.e., either super bullish or super bearish on one stock but you are to love the overall stock market and enjoy your journey by diversifying your investments and then holding them through and through.
Therefore this question that is ITC good or not? Or I hold 4000 shares of ITC or 500 shares of Britannia etc should never arise. Now the correct way to allocate these shares is to take clues from mutual funds directly.
Then try to replicate the same. Just one example (though you can make your own portfolio, all this is just for educational purposes only!)
Let us presume that a person has Rs 100000 today. (Rs 1 lakh)
See, if he purchases 200 shares of ITC tomorrow based on the advice that the stock is fairly valued, is this the correct way to allocate shares?
No!
As you have to replicate the mutual funds, i.e., you need to be as disciplined as you possibly can. Now 200 shares of ITC will cost you 200x206=Rs 41200.
BUT
Remember you have to maintain your percentage i.e., of investing less than 5% of your entire wealth in one share but as you had Rs 100000 to begin with and you invested Rs 41200 in just one stock therefore you have broken the rule of discipline here.
The other way of investing in these shares is to understand the concept of FMCG Case i.e., you are making a bucket of excellent shares and investing in proportionally. Therefore, a small replication of FMCG companies can be:
HUL : 1 share costs Rs 2628
ITC : 1 share costs Rs 206
Britannia : 1 share costs Rs 3860
Nestle India : 1 share costs Rs 19967
Colgate India : 1 share costs Rs 1658
Marico : 1 share costs Rs 527
PGHH : 1 share cost Rs 12760
Now let us come to the point of investments. See you are NOT required to put any money in mutual funds. As the expense ratio, brokerage and selling your units eats into your investments and you hardly make money near what your investments in stocks could have given you. Now if you purchase one share of each company you invested Rs 41606 in a total of 7 FMCG companies. This way you created an FMCG Case. Just like the mutual funds do. Here you also are relatively in lesser risk as compared to putting around 40k on one stock and this way as you invest further you can rebalance your investments and try to make sure that your portfolio is balanced out i.e., you invested some what similar amount in all the companies above. This means that as Nestle India is a 20k around stock so the next time when you put your money you omit this share but average in others so that all your stocks have somewhat equal weightage in your portfolio and none of them are over 5% when looked at in the longer term. I hope you are with me. Phew!
So the point of writing this was to help readers in surviving this world and gaining financial independence as early as possible. Just like I have shared with you above a case of FMCG you can make your own case of IT stocks, automobile stocks and so on. The only thing which you are to take care of of is that check the debt to equity ratio of the stocks you are investing in and only invest if you can safely expect the company to survive the next 10 years or so.
If someone just follows these steps, then invests and forgets his or her demat account for a decade. Trust me he or she will gain financial independence but again make no mistake, by forgetting I mean only to not book profits for a decade but not to lose interest in the markets. As you still have to love the markets and enjoy the journey.
One more thing, after a decade of holding you will thank me but I will tell you that I am sorry sir! you will have to hold these shares for just another decade. That will be like 20 years, then after the same period you will shake hands with me but when we will reach 20 years I will tell you that sir, please hold this for 5 more years and then you will first like to thrash me but I am sure by then you will eventually hug me.
I hope I am making sense, as what I am trying to convey to you is the power of compounding only which is the core essence of achieving success in the share markets. Hence, if you are able to hold and endure with stocks like ITC and Britannia for 25 years then trust me this stock of ITC which is trading at Rs 205 today might even cross 35000 in 25 years. Trust me I am not joking, this guess of mine is based on pure speculation only just to try to show you as to how powerful compounding is. MRF share was trading at Rs 1900 on 7th Jan 1999 and today that shame share is trading at Rs 76000. This MRF share has given around 4000% returns since its inception but again when ever you are investing on your own please remember that discipline matters in the long run. Never average a falling stock casually. Never sidestep your disciplined way of investing. Never put all your money on one stock. Be diversified. Finally, never get emotionally attached to one stock.
Most people fail here because they never respect the rules of the stock markets. They enter with extreme greed and enthusiasm thinking that they will like a hero just double their money quickly but are dumped out of the game like a zero as they are not fit for the game. Please think and tell me the name of that mutual fund which has given 100% returns i.e., have doubled money in no time. I am sure you will find very less such examples and most of them will be based on pure luck only.
Just to explain this in other words, you can’t just go and beat Djokovic in Tennis and Ronaldo and Messi in football, Sachin in cricket in just a day! you can only hope to beat these people if first you are willing to work hard for 20 years i.e., consistently. If someone else is telling you something else, they my friend be ready because Djokovic is going to beat you in straight sets, Sachin will smash you for 6 sixes in a row and Ronaldo, Messi will nutmeg you and in all the above cases I believe that you won’t even see the ball!
That is how investing is, no one sees compounding and its power here. Just like the one hoping to beat these guys never saw the amount of years they have put in to reach the level they all have reached in their respective areas.
Hence, to sum this up the key to success in stock markets is to invest in fundamentally sound, debt free companies and then letting the power of compounding to do its job. There is no other way. Thank you!
Disclaimer: This write up is to help friends and new investors to try to understand the psychology of an investor and to help them in succeeding in the stock markets in the long run.
Hope this helps. Don't jump into share market with greed of money, this will totally bang you badly.
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