Year 1997, I was freshly minted engineering graduate, secured well paid job in my first month of final year, and thinking I was smarter than the rest. My final year was what we call “bindass, with damn care attitude”. I was young, naïve, and believed being above few hundred odds in my class is being equal to best. Reflecting back, I couldn’t have been more wrong.
This continued in my early years of investing which can be characterized as impatience, that extra energy to do something, and continuous urge to make an immediate impact or getting results. Like everybody else, I wanted to earn quick bucks and what better way than investing (or trading?) in stock market. You see, I was under the impression that making those few hundreds (or thousands) in small trades and repeating that often will increase my wealth. In other words, it will make me rich. How can that be wrong? After all, I am increasing my cash flow with small profits, isn’t it? Again, I couldn’t have been more wrong.
- It is likely that you may think your greatest wealth building asset is your ability to trade that Reliance stock, which made you 30%, 40%, or even 50% in last two weeks. It is not your wealth building asset even though you made significant money in such a short time.
- A traditional financial planner will say your home is your greatest wealth building asset. At a certain level, yes, it may be considered your wealth building asset.
- Some would say, one’s ability to generate high salary income is greatest wealth building asset. Again at certain level, yes, it may be considered your wealth building asset.
I believe all of the above are wealth building assets. However, they are not the “greatest” wealth building asset. According to me, the greatest wealth building asset is TIME. We all have it since our birth; it has been bestowed upon us by the almighty. Some of us make use of it, some of lose it, some of us do not understand its significance.
If you are value or dividend investor, then you probably understand the importance of time. I have learnt, it can cure many mistakes and provide significant investment leverage. Let me explain with following three stocks.
- I purchased ONGC in year 1999. My cost basis is Rupees 102.9. At the time of purchase my dividend yield (or yield-on-cost) was 2.3%. At that time, this was much lower than a risk free savings account of approximately 7%+. I have not made any investment in ONGC since then. I continue to hold my 1999 position. In early 2009, my yield-on-cost now stands at approx. 30%. Now which investment will give me 30% annualized return on my investment? This is because, ONGC has given me share bonus, and it has continued to increase dividends. The total dividends paid are equal 250% of my original capital. Today if the stock price goes to zero. I would still have taken 250%. As of May 28, 2009, the stocks price is Rs. 1105. This is time in action.
- I purchased LNT in February 2001. My cost basis is Rupees 261.4. At the time of purchase my dividend yield was 2.5%, again, much lower than risk free savings account. In early 2009, my yield on original cost for this batch of investment in LNT is 5.7% in year 2008. As time progresses, I expect this yield to grow further. This stock has already paid me 45% of my original capital in form of dividends. As of May 28, 2009, the stocks price is Rs. 1312. This is time in action.
- I purchased NTPC in March 2005. My cost basis is Rupees 93.5. At the time of purchase my dividend yield was only 1.3%, again much much lower than risk free savings accounts. In early 2009 (i.e. only after 4 years), the yield on original cost for this investment has increased to 3.7%. Here also, I expect this to grow with time. NTPC has already paid me 14% of my original capital in the form of dividends. As of May 28, 2009, the stocks price is Rs. 202. This is time in action.
In all three examples above, these stocks have experienced multiple gloom and doom scenarios of the stock market. But all three of them have survived. The key is to buy good fundamentally strong companies, and prepare to hold them for through stock market gyrations. They will keep paying you dividends and price will continue to appreciate.
In few days I can make good acquaintances, but friendship takes a long time to build. Similarly, I may earn few bucks in trades, but it takes a long time to build wealth.
532555, Building Wealth, NTPC, Wealth Building Secrets