Almost everyone dreams of attaining financial freedom earliest possible. There is little doubt that wealth can only be created by channelising your savings into proper investments. Wealth creation, thereafter, depends on how well your investments reward you.
If we consider different asset classes, equities, in my opinion, is the only asset class that generates future cash flows—whether through value appreciation or other periodic payoffs, from true economic activity.
Equities are a mean to be a participant in the economic rewards generated by a business through economic value addition for its customers and consumers.
All other asset classes do not generate any wealth through economic value addition—be it gold, commodities or real estate. Fixed income investments are only an indirect way to participate in the economic- value addition.
This is because fixed-income instruments are only one of the resources that fuel economic value addition by businesses. Inflation-adjusted returns on fixed-income instruments can never give you financial freedom.
Some might argue that real estate generates regular cash flows through rentals but real estate only generates rental incomes in the nature of annuities.
On the other hand, if we consider a business enterprise, it uses resources like capital, raw materials, plant & machinery and human resources to add economic value. It is this quality of activities that gives it the potential to multiply wealth manifold in a time frame of a fraction of the lifetime of an investor.
This is because many businesses have a potential to scale up rapidly, get operating leverage through economies of scale and an ability to create such an architecture for its activities whereby it can replicate its success (at a bigger scale) repeatedly to grow exponentially at geometric progression.
While there is no doubt that equities are probably the only investment vehicle through which an individual can fulfil her dreams, the way to use equities to this end would require proper planning, developing a suitable temperament and discipline.
In the coming articles, we shall see how the objective of creating wealth through equities could be achieved in a systematic manner.
(The author is a fund manager at Globe Capital Market Limited and this article is the first in a series on creating wealth through equities)
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