There are some eternal questions: “Why am I here?”, “What is the purpose of my life?”, “Where should I invest?” Metaphysical questions aside on which we have no clue, the investing question can certainly be carefully considered and conclusions drawn.
Of course, the first possibility is that you could just stuff your cash into your mattress and keep it hidden, even from bugs in your bedroom. But, beyond the challenge of not damaging your spine while sleeping, there’s also the problem of inflation.
The money stuffed in your mattress is going to be devalued by any future printing of new money by the Reserve Bank of India. If there were just a hundred Rs.100 notes in India, and you had twenty of them, and the government printed a hundred more, your notes would decrease in value by 50 percent.
What does that mean to you? It means that the money you hide under your mattress is less than it seems. More rupees are coming onto the scene, and your money in the mattress isn’t out there attracting them into your account via investment. What can you do to stem this tide of dilution?
Well, you can lug your mattress to the nearest bank and drop your cash in a savings account, which could earn you extremely modest interest. But many people are turned off by the idea of just discarding savings into a bank earning a (yawn) meagre amount every year. Further, surveys – unscientific, with a huge margin of error – indicate that the main reason we don’t save money is that there’s no damned fun in it! As you drop your savings into the bank, while it earns forgettable interest, everyone else gets to drive down to the latest pub in a really fast red car. Who’s having more fun out there?
So, the bank is not the resting place for your savings. Because of inflation, your savings will only lower in real value. Well, there are other investments, which also give you higher fixed returns, hoping to match if not better inflation. Fixed deposits, Debt funds, Debentures immediately pop in one’s mind. But, the cardinal investment principal of a direct relationship between risk and reward will limit your scope to AAA quality fixed income investments. What this means is no mind boggling and heart pounding 20% and 25% returns. Back to safe and steady, with a moderately higher rate than your savings account. We need to liven things a bit here!
How about the stock markets? No words speak as eloquently and convincingly of the reasons to invest in stocks as the performance of the BSE SENSEX over the course of its history of 42 years. And it is that image – the little line that zigs more than zags, soars more than it sags, proceeds almost unfailingly up the Mountain of Eternal Growth. Look at the BSE graph. Notice three things:
- Notice the direction it goes.
- Notice that it doesn’t proceed in a straight line of perfectly algebraic slope.
- Notice once again the direction it goes.
Over the last 42 years, the SENSEX has compounded at 15.8% p.a. i.e., if you had invested Rs.100 in 1979 in the SENSEX it would be worth Rs.47,400 today – a 474 times rise!
Our financial media and investment pundits do their readers a constant, ongoing disservice by causing them to focus on the short term. Just as the general news media want you to focus minute-to-minute on the latest terrorist attack, the latest political crisis, the latest environmental crisis, our financial media and investment pundits want you to think hard and worry constantly about where the market’s headed NEXT. And what happens to us? We get caught up in short-term thinking and find ourselves worrying how our investments are doing right now, this week, lately. It’s human nature to think that perhaps the market is terribly overvalued, or that we’re entering a period of perceived economic decline, or worry because one of our investments has been halved. Talk about losing the forest for the trees!
Unfortunately, this prevailing practice causes huge numbers of adult human beings to think that the stock market is too risky for them. They forget that the stock market simply reflects the long-term growth of Indian and international business and that when you buy into it, you’re purchasing a piece of that future growth. Instead of the NEXT, these elements should cause us to question our nature, to think bigger than we otherwise might, and should remind us of history and truth. And when it comes to the stock markets, history and truth are perfectly embodied in the 1-2-3 approach.
Obviously, if you focus in on any given two-to-three year period on that BSE graph, you might see the line zags more than it zigs – you might see a “bear” market. And those who invested only during that time, selling out at the bottom and swearing off the market forever (“It’s rigged!”), in most cases deserve what they get. Anyone who invests in the stock market over a short-term period is doing the investment equivalent of spinning a roulette wheel.
[CAUTION: We have no idea where the market is headed over the next couple of months. Neither does anyone else. Anyone who is presuming to call the short-term market direction is most likely a quack]
But will growth be “eternal”? Will the market continue its rise on and on and on, until the ultimate cessation of the human race? Good question. If you have a definitive answer, please let us know.
Over the long term, the market reflects the growth of business. (Over shorter periods, the market can move for a hundred different, ultimately less consequential reasons.) So the first question is, over a prolonged period – say, as long as a human lifetime – will business always grow? Well, what grows business? A huge number of factors, primarily things like population growth, literacy, advance in science and technology, environmental conditions and governmental stability. So the question changes to, do we at present perceive conditions that would lead to fifty years of stagnation or decline?
It’s very easy to create scenarios in which that would happen, but most of these scenarios involve catastrophic events (nuclear war, lethal airborne viruses, alien invasion, an evil tyrannical force capable of mass brainwash – or all four at the same time). What then? In each of those situations, may we suggest to you that you’ll have a lot more to worry about than the returns of your investment portfolio? Each of these could bring about the effective end of our civilization as we know it.
Thus, our best guess is that so long as our civilization is still around, you’ll continue to see long-term growth in business and the SENSEX climb unfailingly up the Mountain of Eternal Growth.
Milan is a veteran stock market investor and educator on equity investing. Connect with him on firstname.lastname@example.org