Investing in Productive Assets

Indians are the largest buyers of gold, a high value yet unproductive asset. As the saying in the industry goes, “If India sneezes, the gold industry will catch a cold”. This article will highlight the benefits of investing in productive assets.

Yet gold you see is ultimately just a piece of passive yellow shiny metal. It does not produce anything. Yes, it is the core ingredient in the making of expensive jewelry and is used in a very limited number of commercial applications, but ultimately it is just a passive commodity. It is theoretically possible, for instance, that humans start irrationally valuing a certain grade and shade of green apples one day and send it's priced through the roof, though that particular type of green apple does not have any increased productive value to justify its price increase. When you think about it, our affinity towards gold is very similar! We place a high value on it because humans like it for some reason.

Likewise, our domestic populace seems to dislike investment in equities, a highly productive investment. Buying stock in a high-grade company buys you an asset that employs intelligent managers, thinkers and employees who’s main focus is to try and make their company produces.  The company strives to grow and produce more output than it has in prior times. The company pays dividends and reinvests profits to further grow the company. This asset – company stock - your investment, is productive. Unlike buying gold, you are buying an asset that is actually growing!

Long term investment tenet: buy high quality stocks

India is a long-term growth story. Any long-term thematic view of India as an investment destination will paint a similar picture, and this is a story we have heard a thousand times over: buy into high-quality companies and sit on it. India’s domestic dividends are bound to grow by leaps and bounds. We are a young country, with an ever-increasing middle class, and a productive workforce. Combine this with world-class management talent, and you have an amazing investment destination called India.  Yes, politics will get in the way but ultimately, India will grow…grow very big and productive.

So who is benefitting from this growth? Well again, our domestic populace seems to near completely disregard the stock market as an investment option. In a country of nearly 1.3 billion people, the latest data from SEBI shows that there are only 18 million investors! Our people rather buy gold, or land, thinking that long-term, gold – an unproductive asset - will grow faster and bigger.

You know who is increasingly benefiting from India’s growth? FII’s. Foreign Institutional Investors are buying Indian equity in droves. Their smart investment managers have pumped in over 24 billion USD into India's equity markets in 2012. FII’s are increasing their investments in India, while India's Domestic Institutional Investors (DII's) seem to be reducing their investments in Indian companies.

So now ask yourself, as a smart investor who wants to see her money grow, why are you not investing in high-quality Indian stocks? Here are a few reasons why you are perhaps staying out of the Indian growth story, and how you can and should change your perception:

High volatility: as a trader, you most likely try to capitalize from short-term volatile movements. As an investor, high volatility is not your friend! The way you get around this is to take a long-term approach to investing. When people talk about the India growth story, they are not looking at it over the next 2-3 years…they are speaking about the next twenty+ years. You need to think long-term – in a ten to the twenty-year time frame, short-term volatility will have very little relevance.

Short-term returns: again, as an investor, your sole outlook should be to identify high-quality companies and invest in them.

Fear: do not let fear dictate your investment decisions. Pay attention to empirical data and use common sense. The more independent research you do, the more comfortable you will become your investment decision. Fear can be controlled through proper analysis and education. Do not simply put your money into an investment vehicle du jour because someone told you to do so. Do your own research, your own analysis and derive your own conclusions.

Long Term: Stocks may swing up and down short-term, but long-term, your returns will almost certainly outsize any other investment option. The best money managers in history have followed a long-term outlook on investing. They consider everything over a 10-20 year horizon, at least.

India’s inevitable growth will inevitably be driven by its world-class domestic companies. As a long-term investor, you need to be part of the Indian Equities growth story. So ditch the gold and land, and buy into high-quality stocks, and watch your investment grow. Smartly done!