In the previous post, we took a detailed look at a few of the top reasons why 90% of investors are unable to create wealth from stock markets. Now let’s take a look at the secret behind why the remaining 10% can make money.
This 10 % of investors do the exact opposite of what 90% of investors do such as:
- They don't invest based on rumours or tips
- They don't invest in penny stocks
- They don't indulge in short-term or intraday trading
- They invest with a lot of patience
- They invest in fundamentally sound companies
Now, this 10 % of investors do everything right to create wealth from equities. However, even 10% of investors make some mistakes as a result of which they are unable to build fortunes.
I am sure you would be anxious to know what these mistakes are. Well, there are a few.
Let's take a detailed look at the same:
These investors invest in good businesses, but sometimes even good companies have problems
To give you an example, let's consider the case of Satyam Computers, which was once one of the fastest-growing IT companies in India. Everything looked promising for the company and its chairman B Ramalingam Raju the then poster boy of India's IT revolution, was rubbing shoulders with top CEOs of the world.
From an investment perspective, the company seemed to be a perfect investment opportunity, another Infosys in the making. So if everything seemed perfect, why did the investors lose money in Satyam Computers?
Well, here's the answer. In 2009, B Ramalingam Raju in a letter to Satyam's shareholders, admitted that he had deliberately manipulated the company's earnings and almost $1 billion cash reserves were fictitious. As a result, Satyam's shares fell badly wiping out investor wealth of almost Rs. 14,000 crores.
Now if you are wondering if everything was going fine for Satyam, what was the need for this financial misappropriation in the company's account books in the first place. The answer to this is greed.
Maytas (Satyam spelt backwards) Infra, another group company of B Ramalingam Raju, had purchased large tracts of land especially in those areas where the proposed Hyderabad Metro project was supposed to come up. However, contrary to Raju's expectations of prices spiking up, the property prices crashed by over 50% due to the global recession of 2008. The founders of Satyam Computers tried unsuccessfully to buyout Maytas Infra for $1.6 billion. The deal was rejected by investors. This left B Ramalingam Raju with no option but come out with the truth of alleged financial forgery committed by him. Rest as you know, is history.
Police arrested Raju, and his younger brother and the company got merged with Tech Mahindra. Satyam had the potential to become a world-class IT company, but the damage caused by the greed of the management ruined it all. Read more about importance of management quality here.
Now let's take a look at another example. The Singh brothers, former owners of Ranbaxy Pharmaceuticals, a classic example of how poor corporate governance can ruin an established business house.
Ranbaxy Pharmaceuticals was world-class pharma company with a considerable demand for its products and a strong R&D team. The company was doing very well, but despite that, the promoters Malvinder Mohan Singh and Shivinder Mohan Singh decided to venture into financial services (Religare) and health care (Fortis Healthcare).
In 2008, they sold their stake in Ranbaxy to Japan's Daiichi Sankyo and invested the money for the expansion of Fortis Healthcare and Religare. Within a few years, they turned Fortis Healthcare into the country's largest hospital chain and Religare Enterprises into one of the largest NBFCs.
While on one side, the Singh brothers transferred around 2700 crore rupees to their spiritual guru, Gurinder Singh Dhillon, head of the Radha Soami Satsang sect for unknown reasons, on the other hand, they took enormous loans for expansion of Fortis Healthcare and Religare. Financial mismanagement coupled with aggressive expansion drive destroyed wealth of Singh brothers as well as investors who had invested in their group companies. As of now, Malvinder Mohan Singh and Shivinder Mohan Singh have been slapped with multiple cases of money laundering, siphoning off of investor wealth for other purposes and host of additional charges.
Easy access to credit can encourage greed and tendency to overdiversify
This 10 % of investors are the ones who have created wealth from stock markets. This means they are wealthy and also have easy access to credit which can create a tendency to overdiversify. This, however, can be a big drawback because generally, when we have more money to invest, we tend to invest haphazardly in any opportunity that comes our way. On the contrary, when we have less wealth, we think again and again where to invest.Learn more about imporatance of adequate diversification here.
Not keeping EGO out of investment decisions
Once they get into the elite 10% club of successful investors, some investors base their investment decisions on ego. The tendency of "I cannot be wrong with my investment choices or how can I be wrong with my investment decisions" may creep in. This prevents such investors from making rational decisions.
To summarize, 10% of investors create wealth from stock markets because they do precisely the opposite of what 90% of investors who make losses do. Despite this due to some unintentional mistakes they are unable to create sustainable wealth, an achievement which only 2% of investors in stock markets can boast of.
Read more about secrets of wealth creation here.