How to build wealth in stock market?
Investors find quality companies as their safe haven for long term investing. If we ask any investor around the globe, where he wants to invest for the long term, then the unanimous answer will be, “we want to invest in quality companies”. No one wants their money to be with bad quality companies. Why it’s so that, the investor wants to invest only in quality companies? To find the answer to this question we need to turn a few pages back and look into financial history. Financial history shows that big money in the stock market over a long period of time is made by only investing in a quality company. and this is the precise remain why most of the investor run behind investing in quality companies all their life. Wealth creation in the stock market consists of three main variables.
Buying quality companies
Paying the right price
Hold for long term
An investor has to understand that the compounding of money in the market happens only by investing in quality companies and not in non- quality companies. There is no substitute for quality. Investors should seek both qualities of management and quality of business. Most of the time quality companies would be trading in premium valuation in the market and buying those companies at premium valuation may dilute our future return. Investor much understands very clearly that, just because of the quality of the company is good, we should not be willing to pay more for buying.
Quality companies are generally last man standing companies. When there is some kind of recession in the economy, most of the companies would die or struggle in their core business but quality companies move stronger in those situations.
Paying the right price
Paying the right price holds the key to increasing our portfolio return. For example, if we pay a very high price for a quality business, then our future return would be not so great, even though we invested in good companies because we paid too much. The price we pay for buying dictates our future return. So, it is very much necessary to buy quality companies at the right price. But the problem is most of the time quality companies would be trading at premium valuation and it would be very difficult to get the right price for our purchase. In these kinds of situations, an investor has no other option but rather to wait patiently to buy at the right price. The market doesn’t provide opportunities on an everyday basis. The market is very generous to give us a buying opportunity once in 1 year or 2 years. So, when we find these types of opportunities, we must grab it like hell because opportunities are very very rare in markets. We should not wait till the dust gets settled to make our investments.
Hold for long term
Most of the time people forget the basic rule that the building of wealth takes many years or even decades. Most people think that wealth can be created by frequently moving in and out of the market but investor forgets that we can make a lot of money in the short term but building wealth takes long term. Long term investing mindset is a powerful technique which most people don’t use. If we fix our mind that, our investment horizon is about 20-30 years then the way we see and buy stocks changes drastically. Having a long term approach requires immense patience. All the great investors have a great amount of patience.
If an investor misses any one of these parameters then the wealth accumulation in the stock market would only remain a dream for them. Investing is a step by step process, whether we like it or not we must move only one step at a time and we cannot directly jump to the end. Wealth building is a slow and steady process and one must understand that it takes time. Time is the friend of a good investor and an equally big enemy of a bad investor. Investors who are irrational and impatience have got no space in the market. Nature of the market is such that, it will attract its participants by showing that it can give quick big returns but markets will reward only for those who remain invested for the long term.