Does Investing take too long to build wealth?
“… Even Warren Buffett build most of his fortune after an age of 50. Admit it, Kritesh. Investing takes too long to make money.” Gaurav asked wickedly.
“I’m not denying the fact that investing requires time to build wealth. Yes, it does take time. However, it doesn’t mean that it takes too long time.” I defended my argument.
“But what’s the point of getting rich if you are too old to use that money?“, Gaurav replied.
“You do not need to be in your 50s or 60s to build a massive wealth by investing. There are many investors who are able to gain financial freedom in their late 30s or early 40s just by investing intelligently. Here, how much time it takes to build wealth depends on how early you started and how intelligently you’re investing.”, I added.
I could notice that Gaurav was still not convinced. Therefore, I continued.
“…Moreover, now that you have started the topic of Warren Buffett, I would like to add that he did become a millionaire by the age of 30. Obviously, it took some time for him for becoming a billionaire and the richest man on the earth… However, being a millionaire in the early 1960s was a big deal. Besides, its a lot of money for most people who aims for a financially independent life.” I summed up.
Gaurav seems to understand a little regarding what I’ve been trying to convey for the last fifteen minutes. However, our arguments generally never end within an hour. And hence, Gaurav was ready to fire his next question.
“…So you are saying that investing takes time to build wealth; but not too much time?” Gaurav asked with his witty sense of humor.
“All I’m saying is that for an intelligent investor- creating money doesn’t mean being wealthy in your 60s. One can achieve it a lot earlier. Obviously, value investing is not a get rich quick scheme. However, if you have made the right investments, you’ll start getting decent returns in next few years. Yes, it does take time, but the rewards are also great for those who are willing to be patient.”, finally, I had put my words to meaning.
Does Investing take too long to build wealth?
As a value investor, I understand the importance of investing for the long term. When you invest for a longer time horizon, the power of compounding works in your favor. Moreover, if you have invested in the right companies which and it is giving good returns, it does not makes much sense to sell that stock just to keep the money in the bank account. Keeping the stock for the long term in your portfolio is the key to build wealth. But how long is relative to your goals.
Nevertheless, one should always remember that successful investing is a tricky business. It takes years of time to learn to invest intelligently in the stock market. Most people should not expect to make money investing over the short term. Besides, the majority of the good stocks takes at least 2–4 years to give amazing returns to their investors. Investing for six months is only good for making small profits, not wealth.
Earning from capital appreciation
Most stocks investors know this method to build wealth. Buy low and sell high. While investing in stocks, you can expect to make money through capital appreciation i.e capital gain when the share price rises. The profits can go as high as +1,000% (also known as ten-bagger stocks). However, even for the safest stock, there is no guarantee that the price will go higher in the short term.
Earning from dividends
Apart from capital appreciation, investors can also make income from the dividends. A healthy company distributes profits to its shareholders in the form of dividends. In most cases, the company partially distributes profits and keeps the rest for other purposes such as expansion, buying new assets, share buybacks etc. The dividends are distributed per share. If a company decides to give Rs 10 per share, and if the face value of the share is Rs 10, it is called a 100 percent dividend.
Anyways, an important point to learn here is that dividends grow over time for fundamentally strong companies. And if the dividends from the stocks are consistently increasing over the years, this means that the net income for the investors will also increase over time.
Wealth creation over long-term
You might have heard the wealth creation stories of the common stocks like Wipro, Infosys, MRF etc. An investment of Rs 1,000 in these stocks in the early 1990s would have turned out to be worth over multiple crores in next 25–30 years.
Most people argue that no one can keep a stock for so long time frame. And I agree with their logic. Even, if I had invested in such stocks, there might be a few times in the time period of the last twenty-five years when I might have been tempted to sell those stocks and book profits. Overall, I agree with the logic that holding stocks for 25–30 years is a little difficult.
However, people ignore the second assumption that the investment in stocks was just Rs 1,000. This is something worthwhile discussing here. If I was an investor in those stocks, I would have definitely increased the investment amount with time. Investing just Rs 1,000 doesn’t make much sense if you already know its history of consistently making wealth over time. Any intelligent investor would have increased their investments in such stocks.
Therefore, while arguing the time period of investment for such wealth creators, also give a little attention to the investment amount. For simplicity, the analysts consider that people invested just Rs 1,000. However, as a matter of fact, most investors continuously increase their investment amount over time. And that’s why the total returns could be even higher than what mentioned. Even if you had not kept those stock for a long time frame, still the fact is that those stocks would have created a huge wealth for their investors.
Besides, you do not need to sell your stock to build wealth. As discussed above, you would have already made income from the dividends. And moreover, if the value of the stocks in your portfolio is increasing, your net worth will be increasing along with it.
While holding stocks for the long term is the key to build massive wealth, however, it would be wrong to say that investing takes too long to build wealth. Even if you are investing for a decent time frame like 8–10 years, still the returns can be amazing.
Besides, if you do not need the money, it would be worthwhile to remain invested in that stock. There are only three reasons when you should sell any stock- 1)If the fundamentals of the stock changes, 2) When you find a better opportunity to invest, 3) When you really need to money. In all other cases, you should remain invested in stocks.
As Warren Buffett used to say- “Our favorite holding period is forever”.