How an investment of Rs.10000 grew to Rs.535 Crores in 34 years?

If I had the technology to send a message back in time, I would tell 

Mr. A in 1980 to “Use Rs.10,000 to buy 100 shares of Wipro as an one-time investment and never sell it for the next 30-35 years.” If he had done that his investment would now be worth about Rs.535 crores. Yes, you read that right. Crores, not thousands or lakhs.

This is one of the common examples given when people come into investing in shares in India. Almost every indian blog about investing in stock markets give this example and I also post this here as requested by a reader. Lot of people think that it is a lie and don’t believe it, but it is possible and there are numbers to prove it.

Rs.10,000 to Rs.535 Crores

Lets just assume that you bought 100 shares of Wipro each at a face value of Rs.100 in the year 1980. Total investment: Rs.10,000. You don’t touch it at all, no profit booking or buying more shares. Occasionally companies provide benefits to its shareholders by way of corporate actions. They could provide bonus shares for shares that you hold, they could do a stock split where a high face value share would be broken down into smaller face value shares but number of shares increases proportionately, etc.

Wipro has done various such bonuses and stock splits in its history of 1980-2014. Lets now see the different corporate actions and how the number of stocks would’ve grown.

Wipro Investment growth
Year Action Number of Shares
1980 Initial Investment 100
1981 1:1 Bonus 200
1985 1:1 Bonus 400
1986 Stock split to FV Rs.10 4,000
1987 1:1 Bonus 8,000
1989 1:1 Bonus 16,000
1992 1:1 Bonus 32,000
1995 1:1 Bonus 64,000
1997 2:1 Bonus 1,92,000
1999 Stock split to FV Rs.2 9,60,000
2004 2:1 Bonus 28,80,000
2005 1:1 Bonus 57,60,000
2010 2:3 Bonus 96,00,000

After the year 2010, there were no more bonuses or stock splits. But with just that initial investment of Rs.10,000 (100 shares) you now would end up with 96,00,000 shares of the company because of all the stock splits and bonus shares. Current stock price of Wipro is about Rs.557 per share, as of 7 April, 2014.

Rs.557 × 96,00,000 = Rs.534,72,00,000 or about Rs.535 crores. That is a CAGR (Compound Annual Growth Rate) of 47.39%. Does any of your bank FD give you 47% annual interest rate? It was all possible because of the free shares that the company gave to its shareholders as an incentive for investing in their company. If you immediately needed to liquidate this entire holding today (urgent need for >Rs.500 crores?), you can do it and you would have to pay a grand total of 0% tax on your profits, because long-term capital gains in equity is tax-free.

How about additional yearly payout of Rs.6 crores?

If you thought that tax-free Rs.535 crores out of a meagre investment of Rs.10,000 was unbelievable, here comes another shocker. Every year the company announces dividends from its operating profits for its shareholders. As a shareholder, you would also get this benefit for how many ever stocks you hold.

For example, last year 2013 (calendar year), the company announced total of Rs.7 per share. Multiply this with the number of shares you hold and this will be automatically credited to your bank account.
Rs.7 × 96,00,000 = Rs.6,72,00,000 or Rs.6.72 crores for the year 2013.
Best part: dividends are also not taxed at the hands of the shareholder (as of FY 2013-14). So you can take all of this Rs.6.72 crores for yourself.

For a comparison, just calculate your (or your dad’s) current salary per annum and imagine getting Rs. 5-6 crores every year as additional income. How does this Rs.10000 investment compare to all the other money invested in other products like real estate or gold. No other investment would’ve given you annual tax-free payouts. If only my dad had the surplus money to invest in this.

Has anybody really done this? Can I go buy Wipro now?

As the saying goes “hindsight is 20/20”, we can calculate all this only after the company has grown from selling vegetable oils, soaps to becoming an IT major. Had everyone known that this cooking oil company would give such returns in 1980, everyone would have invested in this and become billionaires. Also the shares wouldn’t have been listed on any exchange in 1980 and you would have had to invest privately into the company. Buying Wipro now wouldn’t give you the same returns as the company is already grown to such proportions and such a large cap stock giving multi-fold returns is very hard.

How can I get returns like this?

There have been numerous such companies that have given great returns to investors, like Reliance, Titan, Dr. Reddy Labs, etc. No one can predict which company would grow to such a huge levels before 30 years. Remember, for every Wipro like story, there are thousands of companies which has eroded investors wealth and become penny stocks. Investing in equities alone isn’t enough, investing in the right company at the right time is even more important.

Even if someone invested in the best company in the world, its basic human psychology to book profits when the stock prices increase so many fold. Some investors don’t feel comfortable even for a 50% increase in their investment. No one would have the patience to hold such a stock when he sees how volatile the market is in short-term.

If you really want such phenomenal returns, you would have to do lot of fundamental research, do your due diligence on the company and invest in it when it’s in the early stages. Most important of all is, staying invested in the company for the really long-term to reap the entire benefits.

EQUITIES

The securities market has two interdependent and inseparable segments, the new issues (primary) market and the stock (secondary) market. The primary market provides the channel for creation and sale of new securities, while the secondary market deals in securities previously issued. The Stock market or Equities market is where listed securities are traded in the secondary market. Currently more than 1300 securities are available for trading on the Exchange.

About Equities
The Equity market also known as the stock market is where the listed securities are traded in the secondary market. This is one of the most vital areas of a market economy, as investors have the opportunity to own a slice of ownership in a company with the potential to realize gains based on its future performance. The price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood More >

Trading
NSE's automated screen based trading, modern, fully computerised trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest. The NSE trading system called 'National Exchange for Automated Trading' (NEAT) is a fully automated screen based trading system, which adopts the principle of an order driven market.

Clearing & Settlement
NSCCL carrries out the clearing and settlement of the trades executed in the equities and derivatives segments of the NSE. It operates a well-defined settlement cycle and there are no deviations or deferments from this cycle. It aggregates trades over a trading period, nets the positions to determine the liabilities of members and ensures movement of funds and securities to meet respective liabilities.

Risk Management
NSCCL has put in place a comprehensive risk management system, which is constantly upgraded to pre-empt market failures. The Clearing Corporation ensures that trading member obligations are commensurate with their networth.

What Is The Stock Market?

What is the stock market ?When beginner investors first enter the the trading game, they think that they have a full grasp of what trading is all about.

Usually their understanding of the stock market is limited to what they have heard or read.

Sometimes this can hinder beginner traders from really getting the bigger picture. I want to give you a clear definition of what is the stock market so you can be well equip before your first trade.
There are 2 ways to view the stock market:

a. Wall Street- it’s a place where you trade (buy and sell) stocks of companies

b. People’s opinion – you’re trading people’s opinion about a company. This opinion is represented by stocks Both are true. However, the first definition or perception does not fully represent what goes on in the stock market. It’s a definition that will not help you book profits. It’s not just a place where you simply buy or sell stocks. The stock market is more dynamic than that. Definition #2 helps you understand the market better.

So Let’s look at what is the stock market from a traders point of view:

Traders buy stocks that are being bought by the professionals and they sell stocks that are being given up by the professionals. Why? Because the opinion of the professionals matter. But wait, there’s more…
The stock market is not only comprised of professional traders. Professional or profitable traders will not be where they are right now if not for the hogs and sheep. These are the players who always get slaughtered in the stock market.

Hogs and sheep are not victims of the stock market; they are victims of themselves for getting into something without proper education and experience. They sell stocks that professionals buy and they buy stocks that professionals want to get rid of. This happens because they don’t know how to read the hints and clues that the market is giving them. This happens because they have no solid education.

Why do we need to buy and sell with the professionals?

Because their opinion is the only opinion that matters in the stock market. Professionals have the money to move a stock price higher or lower. They are the ones who dictate the game and we simply play along, and most importantly, we must always play on their side.
If the professionals’ opinion about a company’s stock is that it’s going to bring them profits in the future, they will invest money on that stock. As more traders invest with the professionals, stock price moves higher. Then, when it’s the right time, the professionals will sell and book profits. When this happens, and you don’t understand how professionals move the market, you’ll stay in the trade until the stock price has moved lower than when bought it.
If you think that you can start a move and the professionals will follow, uhm, not going to happen unless you have as much money as them and we’re talking about millions and billions of dollars.

How do you know when professionals are starting to buy or sell?

Through candlestick patterns, If you’re not familiar with candles, then this goes to show that you’re not ready to trade the market yet. The ability to analyze and read candlestick chart patterns is one skill that every beginner investor must possess.
So anyway, candles can be found in a stock chart. I know it’s not easy to imagine, but the market communicates with traders through candles. This is why, as a beginner trader, you should educate yourself about technical analysis, a study of stock charts and candles. Otherwise, you’re trading the market blindly. If you’re serious about making money in the stock market, you should invest in your education.

What if you get in the stock market without education?
I’ve said it above, hogs and sheep get slaughtered. That’s what happens to traders who do not invest in their education. Trading is a business. It’s not a hobby or a place that grinds money for anyone who’s ballsy enough to get into it. I promise, the stock market is ballsier and more cunning than anyone of us. If you want to get on her good side, get some proper education and learn how to understand her. Get intimate with her and she will repay you.