Compound interest is the eighth wonder of the world. He who understands it, earns it. He who does not pays it, legendary scientist Albert Einstein said, and is often quoted in several articles on personal finance.
Very little importance is given to why and when Albert Einstein made that statement on compound interest. Honestly, nobody should care. His name is enough to add credibility to the context. However, this column is not about the concept of compound interest. It is about your temperament. At the end of it all, your ability to ride through multiple market cycles makes you a winner in creating wealth.
You need to make some effort to build that ability. It would help if you were born with a patient mind. However, the chances of you falling for the ‘high risk, high returns’ model would also be dim. Most of us in India prefer not to take risks. Considering the history of our nation, we are a patient lot. We allow a benefit of the doubt to our governments. Most of us do not take any law into our own hands and indulge in street demonstrations like those in neighbouring countries.
We need to show a similar level of patience to our investments. While it is empirically proved that equity assets generate an inflation-beating return over 10-15 years and do better than most other asset classes, we expect to get rich quickly—that lack of patience to allow equity investments to grow stalls wealth creation. Everything is going for India’s growth story.
In the US, Berkshire Hathaway became the first non-technology company with a market value of over $ 1 trillion. That is a remarkable rally of support for Warren Buffett’s way of investing. It is probably a textbook on patience that allowed him and his team to ride through market cycles successfully. As everyone looks to invest in stocks, Warren Buffett’s company has accumulated a quarter of a trillion dollars war chest. That is probably more cash than even central banks in many countries. Berkshire is waiting for the next selloff in share prices to deploy that money.
The run-up in the share price of Berkshire Hathaway shows that patience matters a lot in wealth creation. You need to seek professional advice to build that skill. Your temperament is also a function of your confidence in earning your income. You must hold on to your quality investments to ride through market cycles and create wealth. The future of your money depends on you much more than you think.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)