Want to be rich? - Part 10

First, I wish to thank all my readers for sending me e-mails presenting their point of view on my series on Want To Be Rich? Some have asked me not to stop at part 9. Others have pointed out different points of view. I have therefore decided to continue the series till I exhaust all my ideas.

But before I restart, please understand that I do not claim any expertise on this subject. These are my views of managing money. It is intended to make you think about money and your future.

*******

An important ground rule in your path to becoming rich is to understand that high returns are always associated with high risks. Always. So, if someone is promising you high returns but telling you that there is no risk, then that person is making a quick money - from you. So, please venture into high risk-high return schemes only if you have excess money and/or if you are young.

And then there is always the Black Swan.

A relatively safe instrument of making money from stock markets is what in India is called the Mutual Fund Systematic Investment Plan (SIP). This is particularly affective when the share market is in an upheaval. The most important think to remember in an SIP is that you need patience.

The way it works is similar to a recurring deposit schemes. You put in a fixed amount of money to the scheme every month. When the share market is down your money will buy more units. When the share market is up your fixed money will buy you less units. This averages out the fluctuations.

I actually did an experiment. I invested in a mutual fund where I paid a lump sum outright at the beginning and at the same time started investing in an SIP. After a year, the outright payment has given me a return of -14.3% (a loss) and the SIP actually gave me a return of +13.5%.

You will get more information on SIP here and here.

I see SIP as a long term investment plan. I intend to keep it up for about 5 years to see how well it works.

I also see SIP as having better Return on Investment, if you consider the effort and time required to follow the share market directly. Direct investment will most definitely fetch you much better returns, but you need to invest lot more time to understand the share market.

As long as you do not put all your money in SIP, you should be fine.

Want to be rich? - Part 8

There is just one golden rule when it comes to becoming rich. Aand that is ...

You should earn money even when you are not present.

So that rules out jobs.
Or even business where you need to be present all times.

Building a business where you employ clever employees is definitely a very big yes.
Investments in property, shares, mutual funds are a yes.
And surprise, surprise, monetized blogs (such as this one) are also a yes. At least for some (No! Not me! Not yet!)

The trick is to start early.
Reason: You have sufficient time to recover from setbacks - there will be setbacks, guaranteed. Youth is not risk averse. So that helps.

More importantly, the real benefit of compound interest kicks in.

How much do you think you get if you invest merely Rs. 2000 per year for 25 years that returns you 10% compounded annually. It is Rs. 2,16,363 ( more than 4 times)

You are risk averse?
You would like to put the money in a recurring deposit bank scheme that gives you just 5% returns compounded. In 25 years your money will become Rs. 1,00,227 (a shade over double)

But you should have 25 years with you. So don't start at 40. Start when you are 25 years old.

Stock Brokers Are Still Making Money - An Analysis of BSE Sensex Data

And in short term too. You don't believe me?
Just check out the BSE Sensex prices over the past few days (rounded off).

2008
------

Date--------------High--------------Low---------------Difference
12-Nov---------9,929--------------9,377----------------552
11-Nov---------10,397-------------9,801---------------596
10-Nov---------10,571------------10,096---------------475
07-Nov---------10,065------------9,632----------------433
06-Nov---------10,109------------9,635----------------474
04-Nov---------10,668------------10,116--------------552

You would see a remarkable consistency.

Ok. Now let us now check out what happened a year ago:

2007
-----

Date--------------High----------------Low---------------Difference
13-Nov----------19,210--------------18,636------------574
12-Nov----------18,815--------------18,333------------482
09-Nov----------19,330--------------18,737------------593
08-Nov----------19,210--------------18,917------------293
07-Nov----------19,679--------------19,249------------430
06-Nov----------19,919--------------19,337------------580
05-Nov----------20,009--------------19,502------------507
02-Nov----------20,026--------------19,256------------770
01-Nov----------20,204--------------19,634------------570

Zapped?

Did you expect the inter-day high and low in the BSE Sensex of Nov 2007 and 2008 to be similar? Except for 08-Nov-2007, when the fluctuation was the lowest (and hence less money was made) and 02-Nov-2007 when the fluctuation was the highest (when more money was made) the variation is largely confined within 430 to 596 in both the set of data. This is remarkable.

Now are you convinced that the stock-brokers are still making money?

Agreed that the analysis does not indicate if the inter-day high came before the inter-day low in the day or vice-versa, but one can make money the normal buy-low-sell-high way or by short-selling. Please understand that stock-brokers make money everyday.

But what of the ordinary investor? Surely, the average matters? The average of Nov-2007 is way above that today. So, someone who has invested money in Nov 2007 has lost out in Nov 2008. There is subtle difference between sensex falling and making profit/loss. One does not make loss just because sensex falls. One makes profit or loss only when you buy and sell. As long as you don't sell, you are fine. One just needs to ride out this wave. See here.

You are still not convinced? You are a tough nut ... I must say.
Ok this data is extracted from Against The Gods by Peter L. Bernstein.

In early 1930, right after the Great Crash, price of shares fell about 50% of their previous highs. Prices proceeded to fall another 80% before they finally hit the bottom in the fall of 1932. In 1955, the Dow Jones regained their old 1929 prices. Just nine years later, in 1964, the prices were double that of 1929 highs.

Now are you convinced?

Please note that the above analysis was done as this blog was typed out. I took November because this is November. So, it is possible that the conclusion arrived at is purely coincidental. Heck of a coincidence, I must say.

Note: The photograph used belongs to Myles Davidson. Please go here to see more such photographs