Imagine having lunch with a legendary investor like Warren Buffett. The first think he’ll talk to you about is the power of compounding. And when you say “Huh, what’s that?”, he’ll ask “Did nobody teach you about money management?”
And that’s the whole conundrum. Nobody teaches us how to manage money in school. Nor is this subject taught in college. We are left high and dry to face the big bad world without having the faintest clue about how to make our assets grow into something substantial.
Now why is this so? Is it that parents, teachers and professors worldwide have decided that no, we are, under no circumstances, going to teach our children how to manage their assets. No, that’s not the case. What is far truer is the fact that most parents, teachers and professors don’t know how to manage their own assets in the first place, so there’s no scope of teaching this art to others.
And do you know why that’s sad? Because youth is a prime time to sow seeds of investment that will grow into mountains later. When one is young, time is on one’s side. Salting away pennies at this stage puts into motion the power of compounding, a prime accelerator of growth. The time factor gives one tremendous leverage to deal with meltdowns, crises, calamities, catastrophes, recessions, depressions and what have you. As one grows up, one’s intelligently invested money has a very high chance of coming away unscathed and compounded into a substantial amount.
Don’t take my word for it. Just look around you. If you’ve been invested in the indices in India since 1980, your assets have grown 180 times in 30 years. That’s so huge that one is lost for words. This is despite all issues Indian and world markets have faced in these 30 years. All political crises, all wars, all scams, all corruption, everything. And, these returns are being generated by a simple index strategy. More advanced mid- and small-cap investment strategies have yielded many times more than these returns over this 30 year period. So just forget about meltdowns and crises, invest for the long-term, invest for your children, do it intelligently, and involve them in your investment process. Teach your children how to invest rather than making them cram tables or rut chemical formulae. Get them to take charge of their financial futures. Make them financially independent.
God has given the human being brains, and the power to think rationally. Let’s use these assets while investing. We’re looking for quality managements. We want their human capital to be working for us while we do other things with our time. We want them to figure a way around inflation, so that our investment doesn’t get eaten into by this monster. We don’t want them to involve our money in any scams. We want them to create value for us, year upon year. We want them to pay out regular dividends. Let’s inscribe this into our heads: we are looking for QUALITY MANAGEMENTS.
We are not looking for debt. The company we are investing into needs to be as debt-free as possible. During bad times, and they will come, mountains of debt can make companies go bust. There are many, many companies available for investment with debt to equity ratios which are lesser than 1.0. These are the companies we want to invest into.
We are also looking for a lucrative entry price. Basically, we want to buy debt-free quality scrips, and we want to buy them cheap. For that, we need to possess the virtue of patience. We just can’t get into such investments at any given time, but must learn to patiently wait for them. Also, we must learn to be liquid when such investments become available. Patience and timely liquidity are virtues that more than 99% of investors do not possess.