Express press service
Equity shares or shares or scrips. Whatever name you give them, they are fascinating instruments of investment and growth and unlike any other investment option you will get.
Equities are the only asset class where the underlying moves daily. What I mean by this is that although prices may go up and down depending on demand and supply, the product you are buying remains the same in all other cases. Take the example of real estate. It has been on a perpetual bull run until recently. So if you bought a 2 bedroom apartment in Bandra, Mumbai 10 years ago, the price would probably have gone up 5-6 times by now. However, the apartment remains a 2 bedroom apartment and in the past 10 years has not added another bedroom.
This is not true for stocks. Stocks provide you with a share in a running business. I always say that while we buy stocks and make returns when the company is doing well, the real value is added by all the workers and managers that work in that company every day. If you can identify a company that should continue to grow over the next few years, you have found an underlying that will provide you with long-term returns.
Another unique feature of stocks is that when prices are hot, people come in droves to buy overpriced items. On the other hand, when you go shopping, you will buy more if there is a sale, but when there is a discount in the stock markets, people come to sell willingly. For items that have static value, it is easy to determine the benefit they will bring and therefore a direct decision to buy them when the price is low. However, in the case of stocks, if you don’t know the value of the stock, you just follow others, buy and sell when everyone else does.
Another difference is that in everyday life things are clearer in the short term than in the distant future. In equities, it’s the opposite. It is impossible to know at what price a stock will close tomorrow, there can be a good idea 6 months later and a much better idea of where it might be 5 years later. If you get the business model right and are able to predict with reasonable certainty the financial performance of the business, then five years from now the underlying value would have changed so much that even a large temporary drop wouldn’t bring it down your overall returns. .
Listed stocks offer perhaps the easiest way to make money. In business, you have to do something first before you can make a profit. In real estate, even in private equity, you have to make a transaction and bear the risk of illiquidity. However, stock markets are open every trading day, people continually put a price on each of the companies listed there. All you need to know is which ones to buy. It’s simple to say, but difficult to execute because it requires constant research and monitoring.
(Pankaj Chopra is the founder of Five Rivers Portfolio Managers and can be contacted at [email protected])