Should you become a millionaire or an investor first? - The 5 Minute WrapUp by Equitymaster
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Should you become a millionaire or an investor first?

Apr 10, 2015

In this issue:
» Time to get gung-ho about India's rating upgrade?
» The biggest hiccup in India's growth story
» What QE completely failed to achieve
» ...and more!

"Are you joking?" asked a perplexed neigbour, when told that the company I work for, Equitymaster, aims to teach long term value investing to retail investors. The very thought that an individual with just few thousands at his disposal for equity investment can learn a lot from billionaires like Buffett and Munger seemed ridiculous to him.

"Don't they buy big stakes in companies?" he asked, trying to reaffirm his point. "How can I do that with just say ten thousand rupees?"

"Well, buying a stake in the company is exactly the way you should treat every investment of yours, no matter how small. That will ensure you evaluate the business and the management thoroughly. Buffett may buy 10-20-30% stakes in the entities he invests in. Your stake in the entity may be 0.001 - 0.003%. Nevertheless the small stake, in a brilliant company at a great price can make an unbelievable difference to your portfolio. So do not worry about the size of your investment. As long as it is done with the right perspective, you should certainly meet your objective." Unfortunately, my lengthy reply too did not adequately convince the gentleman. So I thought of reminding him of a popular Aesop fable that I read to my daughter ever so often. One which we know as the story of a thirsty crow.

In the story, a thirsty crow cannot reach water at the bottom of a pitcher because his beak is too short. Being the clever crow that he is, he flies away and returns with a stone and places it in the pitcher, noticing that the water level rises ever so slightly. He repeats this several more times, placing stone after stone in the pitcher until finally, the water level in the pitcher is high enough for him to reach and drink from. How can the crow's physical inability be compared to an investor's financial limitations, you would ask. Well, it is not the nature of the limitation but the approach taken to meet one's goals and objectives that matters.

Investing in a good business need not be at one go. Also it is not necessary to invest in the business when it is an unknown entity. A good business that continues to be great and well managed can be bought into at any stage of its life cycle, with a reasonable margin of safety in valuations. So if you had bought 100 shares of HDFC Bank when the bank had its IPO in 1995, you would have had to invest Rs 1,000. Not a very large sum even then. But those 100 shares would be sitting pretty in your portfolio, with a market value of Rs 520,000 today, having multiplied over 500 times! But what would have been even better is if you would have consistently bought the stock every time it was available at attractive valuations.

Also it is not necessary to look for a new company every time you wish to invest. As Peter Lynch has said, "The best stock to buy may be the one you already own". So as long as you are convinced that the company you already own is one that you wish to buy more of, just keep buying it at attractive valuations. That way your pitcher will continue to get full as you keep buying miniscule stakes in a great companies.

So do you need to be a millionaire to become an investor or vice versa? Rest assured, this is certainly not a chicken and egg conundrum. A retail investor, with limited funds at his disposal can certainly aim to have a large portfolio over time. However, the objective should be to invest only in the best businesses at the most opportune valuations every time you do so.

Did you wait to start your investing journey with a large corpus? Let us know your comments or share your views in the Equitymaster Club.

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The hope that the earnings performance of India Inc will give investors some good reason to invest more seems to be dwindling by the day. On one hand the frustration over the government's status quo on most reform measures is increasing. Secondly, companies themselves are doing little to plan capacity expansions and growth. The infrastructure story has hardly gathered any momentum despite the tall promises. And the reincarnated Niti Aayog (erstwhile Planning Commission) has hardly proven itself to be more than a shadow of its former self. Interestingly, however, the opinion on India's future amongst the top rating agencies is quite divided. Standard and Poor's (S&P), which had hreatened to downgrade India to junk status, is in a wait and watch mode. The agency is of the view that its rating for India is unlikely to change over the next three to five years. However, Moody's has already gone ahead and revised India's rating upwards. The basis of the revision in rating is purely the probability of policy makers moving at a faster pace. And while the companies in India continue to complain about lack of change in business environment, the rating agency thinks otherwise. Well according to us, the views of rating agencies have hardly ever reflected the true economic realities. Be it of India or the US! And hence there is very little reason for investors to get influenced by these.

  Chart of the day
The hopes and expectations of investors these days seem fully geared towards GDP growth rates in high single digits. One important ingredient for that to happen though seems to be on shaky ground - skilled labour. As per reports, the country will need almost 120 m more workers by the year 2022. Which is great - more employment is always welcome news. However, this very positive can quickly turn into a burden of sorts if these requirements are not met by the appropriate skilled labour.

This chart pegs the requirements of such skilled labour in the various sectors of the economy. Construction and real estate seems to be one sector that will be highest in need of such a workforce with about 31 m skilled workers needed by the year 2022. This is followed by retail and logistics. Indeed, with this being such an important spoke in the wheels of GDP growth, this is one area that will need a lot of attention from the government in the years to come.

The biggest hiccup in India's growth story - Skilled labour

Central banks in developed countries have gone out of their way to keep their interest rate policies exceptionally benign. All with the hope that this will help their economies come out of the slowdown and kick start growth. But they're getting sleepless nights these days. Why? They're now beginning to worry that instead of achieving growth, their actions may have actually hurt markets' basic function of financing economic expansion.

Sample some worrying statistics from a report in the Financial Times. Compared with forecasts made in early 2007, private investment has fallen 25% in advanced economies during 2008 to 2014. Further, globally listed companies seem to have cut their business investments by 6% in 2014, even while their dividend payments and share buybacks increased by 15%.

It seems for now that instead of creating incentives for corporates to spend on capital expenditure, the loose monetary policies of the developed country central banks are having quite the opposite effect. How capital expenditure by corporates shapes up in the years to come will be a very important factor in determining whether these countries get back on track, or fall lower into the spiral of the recessionary atmosphere.

The Indian stock markets were trading weak today on the back of sustained selling activity in most index heavyweights. At the time of writing, the BSE-Sensex was trading down by around 43 points. Losses were largely seen in banking and capital goods stocks.

 Today's investing mantra
"No formula in finance tells you that the moat is 28 feet wide and 16 feet deep. That's what drives the academics crazy. They can compute standard deviations and betas, but they can't understand moats." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.

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Equitymaster requests your view! Post a comment on "Should you become a millionaire or an investor first?". Click here!

2 Responses to "Should you become a millionaire or an investor first?"


Apr 11, 2015

One can start as a small investor taking small exposure and go on expanding portfolio over period of time. Once stockpicking skills reach good level, availing overdraft against shares and building lifetime portfolio is possible.One has to keep greed and speculation under strict control


Tapan Kumar Ghosh

Apr 11, 2015

Very honestly ur every article is very good with full of motivation n enthusiasm, myself like to be a small retail investor but inexperience marred all my energy n killing my likings,
Don't know if or any time can i be a good retail investor or not, but eagerly waiting to know- when day will come to me for startup..

Equitymaster requests your view! Post a comment on "Should you become a millionaire or an investor first?". Click here!
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  1. Neither Equitymaster, Research Analyst or his/her relative have any financial interest in the subject company.
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Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
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