I was recently having a lively discussion with my friends about investing and getting rich.
Some of them believed that (Equity) Mutual Funds can help one earn 14-15% returns in the long term, whereas if you really want to get rich, you need returns like 30-40% per year and for that you should invest directly in stocks.
Being in the investing profession for quite some time now, I had a slightly different view point.
Often such debates can quickly devolve into arguments as personal finance is a touchy topic, and we tend to tie up our egos with our investing decisions.
So, I decided to write down my points and their counter-arguments to let posterity decide the winner, akin to the famous bet made by Chatur and Rancho (Wangdu) in the blockbuster "3 Idiots". So, it’s a pact then, let’s get back to this investment thesis in 20 years for good measure.
So, what’s my investment mantra?
"All the benefits in life come from compound interest — money, relationships, habits — anything of importance."
Let me break down this tenet that I share with Naval Ravikant, the founder of Angel list and one of Silicon Valley’s most respected thinkers. He was the one who so poignantly phrased it.
I do believe that just by investing in Mutual Funds you are not going to become crazy rich. It is good enough to help you achieve your financial goals and at some point become financially independent which in itself is a great thing but if you want to become really really rich, just investing in Mutual Funds is not going to make it happen.
But investing in stocks is also not going to do it. Conceptually, there is hardly any difference since Mutual Funds invest in stocks only (~40-50 good ones). It is wildly optimistic to think that you can earn 30-40% from the same stock market that your Mutual Fund manager, who has probably devoted his life to it, makes only 14-15% in. In fact, common sense would suggest that you are much likely to do worse.
Data suggests that amateur investors tend to make a lot of investing mistakes when they invest directly in stocks - holding on to losers and selling the winners quickly, lack of diversification, over-trading, analysis-paralysis etc.
Investing in Mutual Funds helps guard against such mistakes as your money is being managed by an experienced professional with a proven track record.
Also because Mutual Funds hold a diversified portfolio of stocks, they are less likely to vary wildly over time, reducing the likelihood of prematurely bailing on an investment. By cutting down this risk, you’re increasing the potential of staying invested, and letting the magic of compounding do the rest.
Compounding in life: Incrementally increasing your skill set
However, I believe that if you want to be really rich it’s not really about stocks vs Mutual Funds (although the latter is the better choice) but it’s about becoming one of the best at what you do. Your profession is your best bet at becoming rich.
In other words, if you want to be really really rich, you have to become really really good at what you do.
You can potentially make 30-40% from the stock markets but for that you have to become crazy good at picking stocks (better than your Mutual Fund manager) and for that you need to make it your life's pursuit, essentially making that your primary occupation.
Most multi-millionaires or billionaires who made their fortunes through investments are people who made financing their profession and have devoted their lives to it.
Or you could stick to what you are already good at and like doing and continuously become better at it. That's where the biggest opportunity for getting rich lies for all of us - in our own work.
I feel that it’s better to leave the speculation on stocks and the market to the experts who make a living from it. We can always 'passively' invest in the market through Mutual Funds as these professional fund managers have years of experience in identifying market trends.
Meanwhile we need to focus on improving those skill sets of ours that can lead to significant increases in our income potential in future. Go do that course or attend that networking event (or join a promising startup early :D) that will help you level up in your career.
Invest in yourself.
See you here in 20 ;)
Co-founder and Chief Investment Officer, Goalwise