Dear Readers,

At Katalyst Wealth, we get many queries from prospective subscribers/clients. However, at times we are asked questions that tell us so much about the lack of application of Common Sense with respect to investment in stocks/equities.

Over the years I have realized that there are some individuals who get it naturally when it comes to investing in stocks and they realize the wealth creating potential of the same, while there are many who just don’t get it and either shy away from stocks or turn to speculative activities like intra-day or other variants of trading.

We too shy away from such potential clients and have therefore clearly stated that, “For whom all our services are suitable and for whom all our services are not suitable”.

Well let’s review some of those queries below:

What’s the minimum guaranteed annual return can I expect?

This is one of the most common questions and underlines the fact that many still don’t understand the nature of stock markets. Investing in stocks isn’t a smooth ride like a bank deposit. If we could guarantee a minimum annual return in excess of 14-15%, most of the banks will have to shut their shops, as they only offer 8-9% annually.

One can get much better returns to the tune of 30-35% CAGR and more on his/her portfolio, however the road to the same is not simple and short. Some years it will be (-5%, -10%), some years 10%, some years 50% and even more and thus it’s all about keeping a long term perspective (minimum 3 years) when investing in stocks.

Obviously, one gets adequately rewarded for keeping patience and taking risks. There can be no better illustration for the same than the annual performance of Berkshire Hathway, the investment vehicle of Warren Buffett. The annual performance varied from -9.6% to 59.3% with the Compounded Annual Gains of 20.20% for 1965-2010. Yes, only 20.20% (as many would say) and yet we know where he stands in terms of personal wealth.

So, if one is looking for guaranteed returns, you should probably turn a blind eye to stocks. Until and unless you start understanding the nature of stock market, it’s better to keep away from it, as its ruthless to those who don’t understand it.

Other service providers are advertising, “Earn 10% return per month, Earn 1 lakh per month” while you are saying 25-35% on an annualized basis and that too over a long term. Why then should I subscribe to your service if I can get 10% per month elsewhere?

This is another classic that we come across many a times. Our simple reply to such queries is, “Our services are not meant for you sir and you should probably go ahead with the one who can help you earn 10% return on your capital per month.”

The reason is simple, one can really not explain it to people who cannot apply common sense. If the service provider can help you earn 10% per month through intraday or short term trading, why is he himself not trading? A simple calculation tells us that at 10% per month, your capital doubles every 8th month. So, if you start trading with 5 lakhs, your capital will grow to 40 lakhs at the end of 2 years and if you can grow your capital at such a pace, the service provider (offering you 10% per month) should probably be on the Forbes list by now :). Moreover, everyone in India would be so rich and leave all other productive activities and indulge in trading on the tips provided by the so called experts.

Do you offer intraday or positional trading tips?

No matter how much we explain it through our mails (through the many investment opportunities shared) that we focus only on Long term investment and Risk arbitrage/Special situation opportunities, the above question arises in many of our conversations with potential subscribers/clients.

I personally believe that all those who seek intraday trading service or trading service of any sort are either out of their jobs, business, etc or are thoroughly disinterested in their profession. In their search for easy money and for some daily engagement, they end up noticing above advertisements “Earn 1 lakh per month”, etc and fall prey to them. Also, they want their families to believe that they are doing something important, stressful and are busy, while not doing anything but just gazing at screen and in the process end up losing their all important hard earned savings.

I don’t see any other reason for so much interest in casino like activity and that too at the cost of losing one’s money.

I like investing in stocks with a price less than Rs 50 as they multiply fast and even if they go zero, the maximum I can lose is Rs 50. Do you recommend such stocks?

While we find the above argument laughable, we also feel pity for those who believe in the above manner because it tells us a lot about how they perceive stocks.

Typically, for such investors buying 10 shares of a stock ABC with a Face Value (FV) of Rs 10 and a stock price of Rs 500 is different from buying 100 shares of the same stock ABC with a FV of Re 1 (assume stock split from FV 10 to FV 1) and a stock price of Rs 50 🙂

The above were only some of the many queries faced by us.

The purpose of writing this is not to mock at anyone’s thought process, but probably help him/her reflect back and start applying some COMMON SENSE.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

Ekansh Mittal [ekansh@katalystwealth.com]