How to Get Rich by Tomorrow Morning

In 1688, the first book about the stock exchange was published. The book was titled Confusion of Confusions, and it was written by Joseph Penso de la Vega. The funny thing is that the book already had—what, over the years—would be considered essential stock market wisdom: “He who wishes to become rich from this game must have both money and patience.”

The above sentence contains the two basic investing principles that individuals need to follow in order to be able to make money from investing. First, in order to earn money, one needs money, which one is in a position to invest. Or as Gulzar wrote in the title song of the 1979 film Gol Maal: “Paisa kamaane ke liye phir paisa chaahiye (to earn money you need money again).”

Second, once the money has been invested, you need to have the patience to wait it out in order to give it enough time to compound and grow into a sizeable amount that will make you rich. The trouble is close to 335 years after Confusion of Confusions was first published, and most investors continue to fall flat when it comes to this basic investing principle.

Take the case of how long mutual fund investors in India continue to stay invested in equity mutual funds. Data from the Association of Mutual Funds in India—the mutual fund lobby—points out that a little over half of the money invested by retail investors in equity mutual funds stays invested for a period of just greater than two years (51.4% to be exact).

Now, what does this tell us?

1) Most stock market experts—when they talk about investing—talk about a holding period of at least three to five years. Come to think of it, even that is on the lower side, and average holding periods should be longer than that and run at least a decade. But, as the data from the Association of Mutual Funds in India (AMFI) shows, a little less than half of the money invested in equity mutual funds is for a period of less than two years. So, clearly, a bulk of the investors do not look at investing in stocks—in this case, indirectly through mutual funds—as a long-term investment strategy.

2) AMFI does not give us a breakdown of holding periods of investments into equity mutual funds beyond two years. My guess is that very few investors actually stay invested for five years or beyond—the period beyond which the real benefit of investing in equity starts coming to the fore.

3) Nonetheless, data shows that things have improved over the years. As of June 2021, retail investors held 43.7% of their investments in equity mutual funds for a period of more than two years. As of June 2022, the figure had stood at a very similar 43.6%. In fact, in the years before 2020, the figure had even stood in the high twenties. Clearly, there has been an improvement over the years. There can be two reasons for the same. First, stock prices have gone up since April 2020. This could have possibly encouraged people to hold on to their investments for a longer time. Second, some of this could also possibly be the positive impact of AMFI’s mutual fund sahi hai campaign. Having said that, there is still a lot of scope for improvement on this front.

Now, the question is, why do investors end up investing in stocks for such short time periods? It’s important to understand this in some detail.

1) Success in almost all aspects of life is due to some activity, but success in investing is exactly due to the opposite reason—the lack of activity. While this is a very simple principle to understand, nonetheless, the simplicity of this principle and the fact that one has to wait makes the human mind impatient. It wants to tinker and fiddle around. When this happens, the basic principle of investing and holding on to that investment for the long term (even if you are buying something as simple as an index fund) goes for a toss.

2) This lack of activity doesn’t help anyone—from brokers to wealth managers to now financial influencers—who are in the business of making money from other people’s money (OPM).

As Adam Smith (not the famous economist) writes in The Money Game about stock brokers: “They could put you in some stock that would go up ten times, but then they would starve to death. They only get commissions when you buy and sell. So they keep you moving.”

Arthur Levitt, a former Chairman of the Securities Exchange Commission, the stock market regulator in the United States, writes in Take on the Street – How to Fight for Your Financial Future: “Warren Buffett, the chairman… of Berkshire Hathaway Inc… likes to point that any broker who recommended buying and holding Berkshire Hathaway stock from 1965 to now would have made his clients fabulously wealthy. A single share of Berkshire Hathaway purchased for $12 in 1965 would be worth $71,000 as of April 2002. But, any broker who did that would have starved to death.” (The Berkshire Hathaway stock, as of Friday, was priced at $550,446.)

In fact, Andy Kessler explains this beautifully in his book Wall Street Meat: “The market opens for trading five days a week…Companies report earnings once every quarter. But stocks trade about 250 days a year. Something has to make them move up or down the other 246 days [250 days minus the four days on which companies declare quarterly results]. Analysts fill that role. They recommend stocks, change recommendations, change earnings estimates, pound the table – whatever it takes for a sales force to go out with a story so someone will trade with the firm and generate commissions.”

Now, up until the late 1990s, before the business news channels were launched in India, this is exactly how it worked. The noise around stocks was primarily created and maintained by stock brokers. Then came the TV channels. They set up the hours during which buying and selling happen on the stock market like a game with minute-by-minute analysis happening.

Over the years, with the spread of the digital medium, this modus operandi has only expanded. The advent of social media only spread this further. Now, everyone and their aunts want to tell you how to get rich tomorrow morning.

Of course, there is enough and more data going around, and something sensible can always be said. As John Allen Paulos points out in his book, A Mathematician Plays the Stock Market: “Because so much information is available—business pages, companies’ annual reports, earnings expectations, alleged scandals, online sites, and commentary—something insightful sounding can always be said.” And this is how it works.

There is so much noise going around that it becomes very difficult for an average investor to invest and then just hold on to the investment because every minute, someone or the other is telling you to do something other than the simple thing of buying and holding that you should do as an investor. In fact, the financial influencers, with their regular myriad recommendations—of doing this and doing that—also feed on the vulnerability of the human mind to keep doing something in order to manage their investment well.

3) Now, let’s consider something that Joseph Penso de la Vega had pointed out in his book Confusion of Confusions. As he wrote: “Profit in the share market is goblin treasure: at one moment, it is carbuncles, the next it is coal; one moment diamonds, and the next pebbles.” At any given point in time, a particular stock, a particular sector or stocks of a certain size seem to be doing well. Those in the business of OPM point out this, and they become pied pipers attracting investors in the direction they want to.

Take the case of the recent rally in small-cap stocks or stocks which rank beyond the top 250 stocks in terms of market capitalization. This has led to increased investor interest in stocks, leading to 3.1 million demat accounts being opened in August—the highest since January 2022. What this tells us is that a lot of investment by retail investors happens only once the stocks have rallied up quite a bit, which is not exactly the best representation of buy low, sell high.

To conclude, there is no real get-rich-quick scheme going around. At the conclusion of most get-rich-quick schemes, there typically lies a scam. Be it classic Ponzi schemes, crypto or trading—which seems to be very hot these days with many so-called successful traders sharing fudged profit statements.

The funny thing is, in their zeal to get rich quickly, people continue to fall into the trap of such scamsters, even though it’s well known that 90% of traders lose money and even those who do make money make very little of it, which is really not worth the time and effort put in.

Nonetheless, every trader I know thinks he is not in that 90%.

Well…The thing is unless one steals money or inherits it, enters an investment bubble in its early stage and has the guts to ride it all the way and the timing to sell right at the top—or is lucky enough to be in the top echelons of a startup which VCs are backing with a massive valuation, which neither the current earnings nor the prospect of future earnings, justify—it’s almost impossible to get rich quickly.

But we are all trying to spin happy endings in our heads, where we sail into the sunset being driven in a car of our dreams onto a beach which is waiting just to welcome us... The fact of the matter is that there is no real way of becoming rich by tomorrow morning or, next month, next year or even by the next decade, though your chances go up as the period of time increases if you invest regularly in a broad basket of investment assets and hold on to your investment.

The headline to this piece was just a clickbait to get you to read this, dear reader. Like people in the business of OPM, I also need to attract your attention. There’s just too much noise out there.

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Written by Vivek Kaul.

Edited by Saikat Chatterjee.

Produced by Nirmalya Dutta.

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