Why long term investments in Equities generate wealth?

Why long term investments in Equities generate wealth?

Equities is touted as a long-term instrument for saving. Investors are being advised today by fund managers to come into equities with only a 2-3 year kind of a view. The question an investor could have is

Why come in with a long-term view when one can make 10-20% today daily?

The reason is very clear.

A 10-20% return comes with a corresponding capital erosion risk. & This return cannot be earned consistently

Further, an investor who is in a stock that is making 10-20% on a daily basis will not sell at the right price.

How many investors sold HFCL at Rs. 1838 or Zee Telefilms at Rs. 1630 in 2000?

The idea in stock markets is to know what to keep after buying and what to sell and more importantly when to sell. However, if one is in the right stocks, then one can hold on for the long-term and not worry about when to sell.

For example, if one bought Infosys in 1995 at a price of Rs. 450-500, one would have made 15133% return today adjusted for bonuses and a split. To put this in simple words, Rs. 10000 invested in Infosys then would have been Rs. 15.2 lakhs today - a return of 58% compounded p.a.

Similarly, Rs. 10000 invested in Gujarat Ambuja in 1995 would have grown to Rs. 35478 - a return of 12.2%.

We have calculated returns from other Index stocks over this period.

Date	Sensex	ACC	Hindalco	Reliance	Grasim	Tisco	ONGC
08-Sep-95	3366.25	140.07	68.73	113.38	504.00	151.33	350.00
08-Sep-00	4668.27	118.35	84.02	310.55	215.95	72.20	102.85
09-Sep-02	3089.47	154.65	74.97	287.00	299.50	86.97	358.45
08-Sep-04	5298.16	276.65	112.00	527.15	1112.85	307.55	803.9
08-Sep-05	8052.56	482.00	147.30	758.00	1300.00	408.00	995.00
11 year return	8.3	11.9	7.2	18.9	9.0	9.4	10.0
5 year return	11.5	32.4	11.8	19.5	43.2	41.4	57.4
3 year return	37.6	46.1	25.2	38.2	63.1	67.4	40.5
1 year return	52.0	74.2	31.3	43.8	16.8	32.7	23.8

 

These returns are much lower than what one could have earned, had one sold HFCL at the top in 2000 (151% return p.a. for 4 years). However, the key there would have been to sell HFCL at Rs. 1838, when it would have been considered foolish to sell a stock giving 20% return per day. If one had succumbed to the temptation, returns would be negative 50% even today.

The idea is, therefore, to find stocks with good management, sound business models, good growth in revenues at the right valuations & to stick with them for long periods of time. Selling should be ideally triggered by a change in the fundamentals or very expensive valuations. Source- HDFC