Why Equity Requires Time To Reward?
Equity rewards on a long time period, if you want to build wealth or make a fortune, then you must give enough time.
All good things in life come after a long time period of persistence effort.
It is the unwritten law of nature. This law can be called compounding.
We all know what compounding and compound interest is. But most of us haven’t made use of this gift by nature.
If we closely observe any graph of compound interest with time on the x-axis and our wish/reward on the y-axis, we reckon that the graph moves slowly along the y-axis with respect to the increase in time. After a certain threshold limit of x-axis (time), the graph will move exponentially along the y-axis.
It means that the reward or anything on the y-axis move slowly initially but after a certain time period(x-axis value), the reward will increase exponentially.
In simple terms, give enough time for your efforts to become fruitful.
This same conviction also be seen in the mathematical formula of compound interest, which we might have learned in our high school. We can say that the compounded amount would be the product of the principal amount and the rate of interest raised to the power - ‘t’ (time duration).
The major term which we must notice in the mathematical formula is - ‘t’ (time).
The time, which is indicated as a power to the rate of interest, denotes that the rate of interest is multiplied by itself for ‘t’ number of times. In other words, the rate of interest is increased exponentially.
Give enough time, then you have more rate of interest.
This conviction applies to every aspect of life, if not only to the wealth accumulation process.
Since we are more worried about wealth accumulation here, we will see how we can apply the power of compounding to equity.
We can term every good business or a company as a compounding machine. If it is a good company, then it will compound positively. Otherwise, it might compound negatively.
With constant effort, a business takes time to standardized it and then get itself optimized over a time. Business will adopt quite a bit of execution methods and strategies to do this, which begs time. This in turn will generate profits.
After this, the business will compound it profits as the time goes by, but owing to external factors of business, it is uncertain on when a business will compound exponential and when it will not. We have few general indications to notice a good compounding business.
In market terms, this ups and downs of the market is called volatility.
Basically, one cannot time the market, we can’t be sure of when the market will go up or when the market will go down.
So it is advised that we stay invested as long as we compound our invested amount.
More the time you give, the more your investment will compound.
You can make money in stock market by taking the profit your investments make, or you can make a fortune by staying invested for a long time period.
The adage - Buy right and sit tight holds true at all times.
Until next time,
Peace out!