Ramesh Damani, the “Nawab of Dalal Street”, has given good tips on how why stocks are the best investment and how to invest in stocks. He was addressing a group of single women on what they should do to secure their future.
(i) Why equities are the best:
Ramesh Damani explained that if you want to be financially free over the next 10-15-20 years, equities are the only sensible investment because they consistently, over any long-term period, given investors superior rates of return as compared to diamonds, real estate, bonds. So stocks is where the action is, and over time, if you want to be financially free, stocks is a great place to be in;
(ii) What is the best time to buy stocks:
Damani pointed out that it was perverse logic that worked in the stock market because the worse the situation was, the better it was for the investor because he got better values. An investor who wants to invest for the next 5-10 years will want to buy things cheap.
(iii) Think of stocks as being on a sale:
He advised investors to change their mindset and think of buying stocks the way they buy other items on a sale. When a person gets a bargain, he rushes out and buys it. So when stocks are at a bargain, investors should rush to buy them because that is when stocks are at a bargain, that they represent good value. The best time to buy stocks is when they are unpopular, he said.
(iv) Why fixed deposits are not a good investment as compared to equity/stocks:
Ramesh Damani explained that young investors with 20 to 30 years of earning power, income power, spending power should invest in stocks because over time, stocks have been consistently able to beat inflation. He equated investing in FDs and recurring deposits to “running on a treadmill’ because you go nowhere. To create wealth, money needs to grow at a rate faster than the rate at which the economy is growing, he said.
Ramesh Damani emphasized that historically, stocks had always done better that the inflation rate and in the past 20-40-50 years, stocks had grown and compounded at a rate of about 11-12% in India, and about 7-8% in global markets.
(v) Income from stocks is tax-free:
Ramesh Damani made an important point that unlike the interest on the FDs which was taxable, the dividends on the shares was tax-free. He pointed out that if a fixed deposit is placed with a bank, there was a 33% tax applicable on the interest received. However, if the same money was put in a blue chip stock like Hindustan lever or Castrol, the dividends were tax free and you also got capital appreciation on the stock.
(v) Which stocks to invest in:
Ramesh Damani strongly advised investment in Index funds because they are low cost and mirror the gains in the Nifty or the Sensex. The alternative is to invest in a actively managed fund with a good track record.
(vi) Why Fixed Deposits are inferior to equity:
Ramesh Damani explained it was a “huge mistake” to invest in fixed deposits as compared to equity because while a fixed deposit gave interest of 9-10%, with 10% inflation and depreciation in the rupee, the investor was not making money.
He explained that the interest was taxable and so the investor was losing purchasing power because the value of the money was going down but he was getting a static rate of return.
In contrast, if an investor invested in a stock that is appreciating at 10-11% per year, he was breaking even with inflation and getting additional tax-free dividend that went into his pocket. So, a stock yielding 2-3% dividend with expected capital appreciation was always a better buy as compared to fixed deposits, Damani said.
(vi) Remember stock market returns are not linear:
Ramesh Damani explained that the reason investors get disillusioned with the stock market is because they expect constant and predictible returns. When that doesn’t happen and there are periods of negative returns, investors get frustrated. Damani advocated a change in the investor’s mindset and advised them to always remember that returns in the stock market are not linear but come in spurts. Over a 3-5 year period, stocks have repeatedly shown in any study to beat almost all of the asset classes like fixed deposits, real estate, gold, diamonds etc.
Ramesh Damani strongly advised that everybody should think as a long-term investor. Be bullish over the prospects of the company and you will probably end up doing fine in stocks as opposed to fixed deposits, he said.