Chief Executive Officer & Managing Director, Motilal Oswal Asset Management Company
As on February 5th, 2015
Mr. Somaiyaa has over 13 years of experience in the fund management industry. His last assignment was with ICICI Prudential AMC, as Senior VP & Head - Retail Business where he was responsible for sales, distribution and product development of Mutual Fund, PMS and Real Estate offerings through retail distribution, banking and private wealth management channels across India and UAE.
Mr. Somaiyaa holds a Bachelor of Engineering in Polymer Science and a Masters in Management Studies in Finance from NMIMS, Mumbai.
New Year Resolutions for Wealth Creation!
Around Christmas day 2014, a friend of mine put up a very funny yet relevant post on social media platform Twitter. It goes something like this; he said "We are exactly 7 days away from the day when millions of people will join the gym for 7 days!" Sounds familiar? While his tweet was absolutely true, it set me thinking about what kind of resolutions I should be making? And more importantly make a resolution which I would surely implement! I make resolutions every year in different areas of life or regarding my responsibilities to different stakeholders. I have a personal resolution, one for my business and I also have one towards investors; serving whom is the very raison-d'être of our existence! My resolution towards investors for this year is to spread the message of Wealth Creation through as many media or platforms as possible and that's why here I am writing to you. I think a lot of people invest in equities to get a slightly higher return on their portfolio but most of them totally fail to realize the true potential of equity investing – Wealth Creation! What is the difference between investing in equities for getting higher return vs. investing in equities to create wealth?
There is a very famous diagram drawn by the noted author Carl Richards and presented in his book called "The Behaviour Gap". He says that because of irrational investing behavior, investors don't get the return that the investment actually generates and hence "investor return" is usually lower than "investment return".
To give you an example, for the 10 year period ended March 31, 2014, the Nifty index returned a compounded annual growth rate of 14.2%. This means that Rs 1 cr invested towards buying some Nifty index fund even would have resulted in the value becoming Rs 3.77 crs. In the same period some of the top performing equity funds and portfolio have generated in the range of 25% compounded. So Rs 1 cr invested towards owning some of these equity funds would have resulted in the value appreciating to Rs 9.3 crs! This has actually happened and there are at least 5 equity funds out there which have delivered this kind of result. Forget owning funds, as I mentioned before just owning Nifty would have resulted in quadrupling of the invested value.
This means, equity as an "investment" has delivered stupendous return in the 10 year period ended March 31, 2014. But how many "investors" have experienced the 9-fold increase in value in their investments? How many such investors do you know? Have you experienced it yourself? Your friends? Family? In all likelihood you may not know anyone in your immediate circle and a wider survey might tell you the answer it not even 5% of investors' return is as much as the investments' return.
Why does this happen? The culprit is our outlook towards equity investing – it's flirtatious; that of trying to fetch some extra return in our overall portfolio. We are told that if you keep all your money in the bank or in fixed rate instruments, you will get say 9%. But 9% in today's world barely beats inflation! If you want to maintain or slightly grow your standard of living you need to aim for 12% or higher. Add some equity to the portfolio for this. We are told about asset allocation, financial planning and diversification etc. Whenever you invest into equity, you must book profits at regular intervals, you must "re-balance" your asset allocation. Every time equity appreciates book profit and move some of it into fixed income and every time equity falls in your asset allocation move money from fixed income into equity. We are all familiar with these concepts and this mode of operation, aren't we?
So let me ask you, have you ever wondered if Warren Buffet practiced financial planning? Heard ever that Warren Buffet has booked profit or rebalanced his asset allocation? Let me tell you, all this busy hectic activity of rebalancing asset allocation, booking profits, tracking market PE, price to book, dividend yield, yield gap etc. is very good if you wish to use equity to fetch 2-3% extra on your investment. It is relevant for those investment goals that are approaching in the short to near term upto say 3 years. But if you wish to create wealth, just invest into equity and forget about it. Compounding doesn't happen by selling, compounding happens when you remain invested. Wealth is not created by booking profits or rebalancing or by selling, wealth is created by sitting! Why do you think everybody puts up that famous example of Wipro (Rs 10,000 worth of Wipro bought in 1980 would now have become Rs XXX hundred crores; and there are some johnnies who faithfully even calculate the updated numbers and circulate it periodically); but nobody practices it?
In my own experience, the average investor loves to "book profits". Time and again I have seen that whenever we have made the right choice of buying a good fund or a good stock, when it appreciates, we love to book profits! And when it is not doing well or when its value depreciates, we become long term investors!!!
So coming back to the business of resolutions, I am practicing mine. If you wish you create wealth, your resolution should be…. BUY RIGHT : SIT TIGHT!!!