Tuesday, September 10, 2013

How to Become a Multi Crorepati from the Stock Markets?

Stock markets have always attracted people towards them as a way to make quick bucks and returns unimaginable anywhere else. People like Warren Buffet, Peter Lynch, George Soros, John Templeton, Benjamin Graham and the Indian Rakesh Jhunjhunwala are all examples who started as a nobody and ended up as billionaires and only because of their one ability - the skill and the ability to identify good investments at the right time and turn them into fortunes. They really did make their bucks run and run hard. 

We all think, dream and fantasize about how the stock markets will turn us too into billionaires or millionaires or the Indian term that's very close to our heart - a crorepati. But is it really possible to become a crorepati from the markets? Do the markets really help us make quick money. If all these people have become billionaires out of the stock markets, why can't the markets give us a crore? Well, they definitely can give you a crore or more if you are willing to take it. But for that you must need patience.

Probably the best approach, without any doubt, is the approach of buy and hold. Buy and hold means to buy share and then forget that you even own them. Do not look at the prices every day, every week, every month or every year. Just keep holding on to the shares. According to what has been seen in the past, the markets do become extremely bullish every 5 or 8 years. That is the time when you should have a relook at your portfolio. I'm sure you will find a couple of stocks which have gone up twice, thrice or four times the original price at which you have bought. These stocks are called multi-baggers and any portfolio which has made wise investments should have a few multi-baggers in there. 

We are discussing one such example here. The example of the best known IT company of India - the erstwhile Infosys Technologies Limited, now known as only Infosys Limited. Infosys was established in 1981 by N.R. Narayana Murthy, Nandan Nilekani, SD Shibulal and four others, all of whom had resigned from Patni Computers Ltd. It was originally started under the name of Infosys Consultants Pvt. Ltd. which was later renamed to Infosys Technologies Pvt. Ltd. then to Infosys Technologies Ltd. and finally to its current form of Infosys Ltd.  

Infosys came out with a public issue in June 1992 at a price of Rs.95 per share, each having a face value of Rs.10/-. Surprisingly, the Infosys issue was under-subscribed, but, thankfully for it, Morgan Stanley picked up 13% equity in it at the offer price. So, if the issue was under-subscribed, it means that all investors were allotted all shares which they had applied for. This means that if a person had applied for 100 shares, he would have got all 100 at a price of Rs.95/- per share bringing the total initial investment to Rs.9,500/-. Infosys, after that, has maintained a good bonus history and dividend history. The table below shows the bonus history of Infosys. 

The above table shows that those 100 shares in 1993 would have converted in 12800 shares of today's time. Infosys is currently trading at a price close to Rs.3000/- per share. This converts it into a total value of Rs.3.84 crores. Infosys gave its first dividend in 1997 and has been giving it once or mostly twice every year ranging from as little as 40% to as high as 2300%. Believe it or not, this dividend alone would have given you Rs.43.25 lakhs. Very clearly that Rs.9500/- in 1992 would have converted into a total value of Rs.4.27 crores in a period of 20 years. 

This was just one example but there are numerous others. One of them was the example of Wipro mentioned by Arun Mukherjee where a Rs.1000 investment translated into 50 crores in 30 odd years. Imagine, if we had applied technical analysis to the above example of Infosys or Wipro and had sold at every sell signal and had bought again at every buy signal, what would our value been worth. It would have definitely gone into three figures for Wipro, if not Infosys. But then, the point is who has all the patience to keep holding to the same shares for 30 years?

I don't know about my readers but my grandfather used to follow the buy and hold approach and had invested in shares years and decades ago and had just held on to them. Did he become a crorepati? No, not even close. In fact, most of the companies that he invested in didn't even exist when he thought of selling them. Well, then the question becomes that it is not buy and hold that works but what you buy and hold that works. That becomes the topic for our next discussion.

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