I have met in my long consulting career
of about three decades many people who believe that the ‘Stock market’ is the
place to make a fast buck – a place where one can become rich quickly. I have
also met an equal number of people who is convinced that stock market is the
most dangerous place on the earth, and that it is meant solely for gamblers and
speculators and certainly not for investors. I can state with conviction that
both the extreme views are far from the truth.
Playing the stock markets is certainly
not the get-rich-quick solution. On the other hand those who enter with such a
notion are sure to burn their fingers. Of course there are a few exceptional
examples of individuals who have consistently made successful bets on stocks,
currencies and commodities, but these examples do not hold good for most of the
large number of speculators indulging in day trading. Those who had made quick
gains a few times should attribute the success only to pure luck; they are
bound to run out of lady luck soon and are face the unpleasant consequences.
Stock market is also a place where
through prudent, disciplined and sustained investments, spectacular wealth can
be built over very, very long periods of time, spanning two to four decades.
Why is it that there are no shortcuts to
wealth creation? What are the essential ingredients of wealth creation?
Essentially there are two key factors
behind wealth creation: natural growth in companies and secondly by the operating
of the compounding effect.
Natural Growth:
Companies that supply goods and render
services in an innovative and efficient manner are bound to prosper and
consequently the long term investors owning the shares of such companies are also
bound to prosper through regular dividends received during the long period of
investment and appreciation in the market price of the shares, on the back of growth
in the ‘Earnings Per Share (EPS)’.
Compounding
The amazing results of compounding were
discovered and propounded by Albert Einstein. The ‘Miracle of Compounding’
works only over long periods of time and especially the spectacular results
start occurring at the fag end of the very long period. Being a natural law
like any other law of physics it operates at its own pace as per its own nature
– there are absolutely no shortcuts.
