As a side note, the fact that we have developed such a powerful and efficient (in the long run) way to allocate capital fascinates me. The stock market essentially functions as a system, driven by greed and self-interest, that allocates resources based on perceived merit and value.
One reason for putting my savings in stocks is the simple fact that stocks have performed significantly better than any other asset class over the past 100 years or so. For instance, the average inflation rate in India for the past 60 years has been around 7 percent, which should discourage anyone from holding cash for a substantial amount of time. Conversely, real GDP growth has been around 6 to 7 percent. Given that roughly 60 percent of our GDP is consumption, I have great trust in Indian businesses and the economy to produce good returns for my capital in the foreseeable future.
Now, should I put my savings in mutual funds or some index? While I think that is the best advice for most people, I don’t think I will do that. One reason is, of course, I am confident (perhaps overly so) that I can beat the market in the long run. But even more important than that is I think it’s a great way to test my knowledge and models about the world and learn from it. For example, participating in the stock market requires you to be a capitalist. Picking a specific company in, let’s say, the paper industry, requires you to learn about the paper industry. You need to have at least a good understanding of the economy and many other factors. Investment as a discipline is incredibly attractive, if for no other reason than the fact that you have to constantly learn about the world and fit that knowledge into a model that makes sense to you so you can make informed decisions. You have to want to win, but you can’t be greedy in investing. That’s my simple analysis, but it’s really fascinating.
I would not be trading because I just think it’s too hard. Instead, I would like to find wonderful businesses and bet that they will be successful in the long run. That seems exciting to me.
And one other thing that can’t be ignored, of course, is I intend to make money from it, obviously. More than that, I hope I don’t lose money. But besides just the potential for gains, I will also be saving at least some part of my earnings, so that’s better than not saving anything. Given all the things I potentially can learn from investing—saving money, learning about various subjects, gaining money, and having a great hobby for my obsessive mind—I think it’s a no-brainer for me to invest in stocks.