Wealth creation - Of gospel truths &half-truths

I recently received a chain mail which went on to extol the virtues of long-term investing. It said - If you had invested Rs. 10,000/- in Wipro in 1980, today your investment would have been worth Rs. 200 Cr.+. Other such examples highlighted were - Cipla - Investment of Rs. 10,000 in 1979 is today worth Rs. 95 cr.+; Infosys - Investment of Rs. 10,000 in 1992 is worth Rs. 1.5 cr.+ and so on.

These are facts, however saying only this much is a half-truth, we will see how, soon.

Another mail I received from a multiple financial services provider. This mail says how the Sensex number has always been near about the price of 10 grams of gold. It adds, whenever there was a substantial disconnect, it became a clear case of over (or under)-valuation of one measure w.r.t. the other. A classic example of non-sense dished out with an objective to confuse and ‘steal’ your money!

In 1980, very few people invested in stocks. More importantly, awareness about the workings of business & industry was restricted to a miniscule set of people. Business media, of any consequence did not exist. The few who invested in stocks were ‘risk takers’ armed with better sources of information about businesses & industry or people who did the hard work to find out information which were not easily available or people who were speculators.

Of the 3, the last category is not the object of our understanding. About the other 2, it would be safe to say that they are more evolved and enterprising investors. They find out about investment avenues which are not commonly followed. They are willing to take uncommon risks and also stick to it, once they have made up their mind and invested. They know that they have made a right choice and will not exit their investments based on a panic reaction or short term profits or any emotion. This is the power of conviction in the long-term story of a business.

Sensex and the price of gold: I’ll not get into the debate of whether gold is a dud investment (that will be for some other time). For the moment, let’s assume that gold is a good hedge against inflation and its price moves accordingly. Then it will be safe to say that the price of gold does not offer any ‘real’ return since there is no economic activity linked to the ownership of it (say unlike a productive asset like property or plant & machinery or farmland or a real business).

Now contrast this with the Sensex – if the BSE Sensex stocks was all that was there to the Indian economy (assumption), it would be safe to say that the growth in the GDP (% terms) should be approximately equal to the growth in the Sensex plus the rate of inflation (since the GDP growth figure is calculated net off inflation).

Can the 2 or their growth numbers ever be identical? Oops…sorry! I am introducing arguments which will lead to demolishing a myth….A herd is meant to ‘follow’, not think!