Why Stock Market Is The Best Investment?
There is a famous quote from Bill Gates that says, If you are born poor, it’s not your mistake, but if you die poor, then it’s your mistake.
I decided not to do that mistake in my life. Since I was a kid, I always wanted to be rich. And, how to get rich? Is the question I used to ask everyone I meet. To my surprise, my parents, teachers, relatives, and even neighbours gave me the same advice. Go to school, get good marks, land up in a decent job, work hard and save money. BOOM! You will be rich.
I wondered, if working hard and saving money would make anyone rich then why is it Forbes 400? (why it’s not Forbes 40 million?). Most people I know, work really hard and save money. They don’t spend money on needless things and have full control over their expenses. But they are not rich. They still depend on their salary. After working hard and saving money for 20 years they still depend on their salary. They are not financially free. I don’t mean to say that working hard and saving money is bad, but all I mean is it’s not enough. why?
Inflation : For example 10 years back when I was in college, we would bunk classes and watch movies in a theatre. And the price of the balcony ticket was ₹ 25/-. I recently went to my home town and watched a movie in that theatre, now the price of a balcony ticket is ₹100/-. The duration of the movie is not 12 hours, it is still 3 hours. But the price of the ticket quadrupled. The same is with soft drinks, popcorn, and even the charge to park my vehicle is almost quadrupled.
It is due to inflation, i.e the general price of goods and services will increase because of the fall in purchasing power of money. In simple language, since money is losing its value over time, you have to pay more money to buy the same product in the future.
Most people save their money in bank fixed deposits. People save money in their bank and feel it is safe. But they don’t realize the risk i.e., the return offered by banks is very low and they are getting poor every time they save money in the bank. By Saving More, You are getting poor. So to protect our money from inflation, working hard and saving money is not enough but one should invest. People do invest their money but the problem is they invest in the wrong products. Because they don’t understand,
“Low Return + High Inflation = CAPITAL LOSS”
Let me tell you a story,
“Ramesh and Suresh were walking in the forest, and they saw a tiger approaching them. Ramesh pulled his shoes from the bag and started wearing them, the other friend got puzzled and asked, do you really think you can run faster than the tiger. Ramesh replied that all I have to do is to run faster than you.”
So all you have to do is to run faster than inflation, to protect yourself from the tiger called capital loss. Inflation is a permanent risk.
Henny Youngman joked about inflation many decades ago saying that- American is getting stronger, twenty years ago, it took two people to carry ten dollars worth of groceries. Today, a five-year-old can do it.
Jason Zweig wrote in his commentary to the book “The Intelligent Investor”,
If you receive a 2% raise in a year when inflation runs at 4%, you will almost certainly feel better than you take a 2% pay cut during a year when inflation is zero. Yet both changes in your salary leaves you in a virtually identical position-2% worse off after inflation. That’s why is so easy to overlook and why it’s so important to measure your investing success not just by what you make, but by how much you keep after inflation.
There is an old that says- A penny saved is a penny earned. But special thanks to inflation, over time, the intrinsic value of the penny that is saved could be much less than when it was earned.
So, if you save your money in the bank, then you are losing it upfront because the return offered by banks is low. Then, where to invest?
These are some of the most popular investments,
*Bank FD: Low return
* Insurance: Extremely Low return
* Gold: Low Return
*Real estate: Illiquid.
The problem with real estate is when you want to buy, you don’t get a seller. When you want to sell, you don’t get a buyer. Even if you a buyer, you may like his price quotation, even if you get a seller, you may like his property. So, what I mean is, in real estate the market is illiquid and the return is pretty uncertain.
But most importantly these investments will not beat Inflation. We have to invest in products that beat inflation over a long period. So, how to save ourselves from the tiger called “Capital Loss”?
Invest in equities/equity mutual funds:
Investing in stocks over a long period is one of the best ways to stay ahead of inflation. Over the last 20 years, the Nifty has returned 15% a year compared to the 7% average inflation rate.
But what are the benefits of the stock market?
- Limited Liability :
If you invest in a stock, the maximum you can lose is 100%, i.e., the money you have invested in that stock, but no more. You are not liable for any failure on the part of the corporation to meet its obligation.
- Hedge against Inflation :
Equity investments act as one of the best instruments to hedge against inflation. In the last 20 years, nifty cagr is 15%, compared to a 7% average inflation rate.
- Free Transferability :
One can sell his shares with a click of a button. Dividends, voting rights, and other privileges will be transferred to the new owner.
- Share in Growth :
The major advantage of investment in equity shares is its ability to increase in value by sharing in the growth of company profits over the long run.
- Tax Advantages:
Long term capital gains tax rate in India is 10%, which is way less than all the other asset classes.
- Profit Potential :
The upside potential of stocks is better than any other investment. A good business bought at a favorable price can give a multi-bagger return.