We all got interested in equity because of one thing “returns”, it generates more returns than any other financial investment option. But this post will try to slap you with the harsh truth that your mind won’t accept – the returns that you’re getting from your investment are not going to make you rich.
If you have a mindset of becoming rich with the returns from your investments, you’ll change your thought after reading this post.
Let’s get started…
If not returns, then what makes us rich?
At the end of your personal finance journey, your goal is to be rich, for that, you may think the reason will be from the returns of one or two multi-bagger stocks will help you but it’s not, the hero here is your “Principal”. It all depends on the principal amount which you have invested in an instrument.
You can predict a multi-bagger stock with a thorough analysis, but without investing the adequate principal in it, even if it produces 100x returns it is never goanna make you rich.
Still, if you can’t believe it look at the scenario below,
Ram and Ravi invested in a stock which generated a 10% return, but Ram invested 10K and Ravi invested 10L… but the returns received were 1,000 by Ram and 1,00,000 by Ravi. It makes sense right!
Let’s take another scenario, where Ram understood this, and he is trying to take a risk and picks a stock that makes 50% return with little more capital now (1L). Ravi doesn’t want to take risks and sticks to the same stock as before – 10L capital and 10% returns. The total value of Ram is 1.5 and Ravi has 11L.
Still, Ram is nowhere near to Ravi, hope you can get what I’m trying to say… whatever the returns you expect “principal” is the core thing in investment and that makes a difference.
What is the point of this post?
Don’t chase returns, it’s not in your control. Your controllable variable in investment is the “Principal” amount so try to make it as huge as possible.
I didn’t know this at my initial stage of investing, and I was investing only a minimal amount on purpose by hoping I’ll get more returns. You don’t make the same mistake.
If you can’t be able to invest more don’t take high-risk investment options for more returns and lose all your capital. Give some respect to your money.
You can’t make more money in equity; you need to make more money outside (job/side hustles) and invest in equity just to make sure you have an inflation-protected corpus. So, earn more money outside to make your corpus big.
If you make any good returns from stocks/MF – you must book profit and move the money to any fixed income instruments to make the returns real, until you book profits it’s not a real profit.
The stock may fall anytime, and it may take years to reach that point again and you’ll regret that. So, book profits when you’re in profit.
You all may know about the trader P R Sundar; he is one of the very few successful traders in India… Do you know what’s his target return % in a trade?
He mentioned in one of his videos that it’s between 3 to 5% per trade… but how does he make so much money? because his principal was huge – it will be in crores… that’s why he is so successful….
E.g. A 10-crore trade for 3% is 30 Lakh rupees profit, hope it makes sense…
Have a mindset of “Invest more, invest more and more” and don’t f*cking care about the return.
In the book “The Psychology of Money” (see later), Morgan Housel pinpoints one thing precisely – you can’t build wealth with the returns you get from an investment.
“I assume the future returns I’ll earn in my lifetime will be 1/3 lower than the historic average” are the exact words from the book.
This means if the Sensex index provided an 18% average return for the past 10 years, if you invest in Sensex for the next 10 years then you should expect only 6% returns. With past data, we can’t conclude we will get the same 18% again.
With this mindset (6%) you tend to invest more principal to attain your target corpus. Whatever you are going to get above that is a bonus.
Always remember, the principal is the one who is going to make you rich not returns.
Have a wealthy week ahead,
If you like this post, you might like this as well
- You don’t know about money | “The Psychology of Money”
- Things to look at before buying an Index fund
My favorites this week
We are what we pretend to be, so we must be careful about what we pretend to be.
Source: Ali Abdaal’s newsletter
Twitter tweet on “Thoughts on predicting future trends”.