Why Equities & why India?
Equities – because they offer us the best chance of overcoming inflation in the long run, and not just maintain, but increase our purchasing power over time.
India – because it is, by the admission of some of the world’s best business-people & investors, the best place to deploy excess savings for the long run. 
Back to the Basics
Money is a necessity of Life, and if possessed by those who can do something meaningful with it, a powerful force to aid in transforming the world. Money runs counter to its purpose when it is hoarded, and when stashed away it decays and loses its value. My note on The Purpose of money.
Inflation is the chief, and silent eroder of wealth, of purchasing power.
Naturally, we must ask – what is the most effective way of overcoming the perilous effects of inflation? The answer is simple : Owning a business; ideally a “good” business.
And we must emphasize “good“, because some businesses are so poor [i.e have such lousy economics] that after adjusting for all the capital & effort it takes to run them, booking FDs may in fact be a wiser option. Poor economics, mediocre execution & lack of leadership cause the majority of unsound businesses to eventually shut shop.
Starting & running a business successfully is extraordinarily hard. This is why >99% of start-ups fail & why those that do succeed, tend to get many things simultaneously right & end up scaling well.
If you have indeed committed your time & capital to creating a “good” business – kudos! You deserve all our appreciation & goodwill. But what if you haven’t, or simply aren’t the type to create & run businesses? What are your options?
We could start by simply looking around us. It so happens that the wealthiest families & individuals all over the world, in every country – are owners of businesses. Allow this single fact to sink in. Not gold or FD hoarders or real estate flippers or even “finance types” – but owners of businesses. (Think Bezos, Disney, Adidas, Gates, Zuckerberg, Nestlé, P&G, Sony.. In India think of Infosys, Tata, Birla, Bajaj, Oberoi etc)
They are either owners of businesses – OR they indirectly own successful businesses – “equities”. And this is what being “in stocks” or “in equities” is really about. The next wealthiest set of people are those who did not necessarily start businesses but slowly inched their way up buying parts of good businesses (equities) over time.
Owning businesses vs Day trading
Owning businesses (equities) is vastly different from “day trading”, or speculative buying & selling over short periods of time – which helps no one. Short time horizons result in situations of stress, constantly checking prices, news flow & in general becoming nervous wrecks. Value investors, who tend to own businesses are generally relaxed, sometimes monitoring businesses every 3 or 6 months & viewing prices as just “FYIs” & keeping their emotions under check. Extended periods of ownership (> 1/3/5 years etc) are hard for most people – and in my view, one of the key reasons to have your excess savings professionally managed – to [clichéd, but true] “save you from yourself”. Ultimately businesses need time to grow to be large, successful & well-run tend to reward their owners meaningfully. People tend to think in multi-year or decade+ time horizons for real estate assets; the same applies for ownership stakes of businesses.
The point about Time and Opportunity in India
A significant number of Indian businesses have done exceptionally well over the last 4 decades. Many household brands & products are in fact sold by what have become outstanding companies. Take a step back to think of things we’ve used or seen over the years.
Companies that perfected household adhesives, paints, coconut hair oil, watches, “Bullet” bikes, cars for everyday people. These companies have been around a long time, and have gotten many, many things right – quality, price/value, durability, distribution (reach in rural India etc). Just how rewarding would it have been to have owned a small stake of rupees 1 lac in these businesses?
The table below shows what 1 lac invested in these business in Jan 2002 would be worth today.
Why 2002 & not some other year?
- It is approximately 15 years ago (15.6 to be precise)
- “Adult” year for me (I was not an infant/ i.e not too far back in time)
- 15 years covers the crucial crisis years of 2008-9 (“worst since great depression”, so should capture the full extent of that fallout)
- a 15 year view helps make it relatively realistic. If we show these companies from the time they’ve been listed, the return numbers are so high they may simply not make any “sense” to our linear brains.
- These tables are not an invitation to go buy these stocks/ businesses, but rather just a simple illustration that “good” businesses selling everyday products must be doing many things right – and that this, over the long run creates wealth for owners of these businesses.
- Companies that are wonderful, tend to stay wonderful. The last column shows the recent 5Y performance of these businesses vs their 15 year average.
- I’ve shown a wide range of outcomes, from HDFC’s 39x multiplier-effect to Eicher’s 1293x – but note what is common to all – the effect of time & how back-ended the compounding effect is. Note that on average, ~80% of the total wealth that was created (over 15 years) in each of the instances happened in the last 5 year period. This is remarkable ; Compounding, as a power function, is heavily back-ended – a much higher proportion of the gains accrue later in life. This deserves a separate note, which is here : my note on the power of compounding.
There are entire case studies that have been written on these businesses, the stories of the founders / founding families, the struggles they went through, how they ended up dominating their niche & what kind of values they have, as entrepreneurs. [see Saurabh Mukherjea’s The Unusual Billionaires which covers a few of these]
India is transforming, radically. Right before our eyes. To be an Indian citizen or even at the lowest rung, an OCI – is a great privilege – even if just seen from the narrow eyes of self-interest – for it offers you & your family an opportunity to grow with India, to partake in that growth, and in some cases, to even contribute to it.
I mention citizenship because the converse isn’t true – regular US citizens can’t partake in Indian mutual funds or buy shares of Indian companies without passing herculean challenges. Their range & flexibility is severely curtailed.
There’s more on the ‘why India’ bit here : Fairfax Notes on Developments in India. These are excerpts from the annual letters of Prem Watsa, one of the most distinguished value investors in the world who recently launched a fund dedicated to India “Fairfax India”. These excerpts provide a concise and insightful view into the key developments in India since the advent of PM Modi in 2014. If you have not been following the India story closely over the last few years, these observations are valuable, and especially so to help you decide in what way & to what extent you would want to participate in the inevitable growth of India.