Why you must invest in equity: Things to know

NEW DELHI: Not everyone likes equity investing. Some see it as a zero sum game, and therefore, wasteful. While some even equate it with gambling, there are some who simply love it, even if they may not understand it well.

The real story about equity investing is neither of these two extremes. Mindless trading does not make anyone rich. Shunning equity as a gamble also does not help, as it shuts one’s wealth from multiplying. So what should an ordinary investor know and keep in mind about equity investing?

First, to invest in equity is to invest in the future of a business enterprise. Despite all pretenses of expertise, no one can tell in advance which business will succeed and which will fail. You should like dealing with the unknown without getting stressed about it.

Second, the many stories you hear about how someone bought a stock for a pittance and is now sitting on millions, are one-sided. It is easy to look track how brilliantly a stock has moved over the years but an actual investor in the stock will tell you how bumpy that ride was. Be aware no one gets paid for doing nothing.

Third, there is no easy way to pick a stock. Only those who have spent their lives analysing stocks have developed the expertise to spot the warning signs. They also cannot be too sure, but they have experience for guidance. Yet, they know that they could go wrong, and therefore, are usually quiet. Discard all tips that are dished out free.

Fourth, the decision to buy is a tough one. There are several listed stocks to choose from, and no one knows which one will be a multibagger. Investors form their own selection approaches—we will call them investment theses. In a formal investment management set up, the specific reasons why a stock is bought is written down. It is a good practice to do that, so performance is tracked. Buying must be subject to a discipline and write down why you bought a stock.

Fifth, an ordinary investor is disadvantaged with respect to access to information and its analysis. A broking house hires and pays for databases, research, qualified manpower, and tracks stocks. A mutual fund is able to hire brokers, apart from in-house expertise in analysis, research, etc. Individual investors have to rely on publicly available information and their own homework. Be prepared for intensive homework.

Sixth, money is not made on single bets. Successful entrepreneurs who set up world-changing businesses are the only exceptions to this rule. Not everyone can be the next Bill Gates or Jeff Bezos. Most of us are not courageous enough to stake all in a single business. We all invest in many stocks, and that is how it should be.

Seventh, when you do not know the future, and you buy based on incomplete current information, and when that does not perform, you must learn to accept your mistakes and cut your losses. Money is made in equity investing not from stock picking alone, but from recognising that your investment thesis was wrong.

A diversified portfolio of stocks, selected for their potential, but replaced when they fail, will deliver the growth you are seeking. Investing in an equity mutual fund is an efficient way to invest in equity. Investing in an index ETF is both efficient and cheap. Investing by yourself is thrilling, but fraught with mistakes as you climb the learning curve. Choose your pick, but do choose equity.

The wealthiest people in the world today are equity investors. Equity investing offers you a fair, democratic, and efficient opportunity to take part in success. Spend your energy on putting down your process for participation.

(The author is chairperson of The Centre for Investment Education and Learning)