Guest Column Lessons from Chinese bamboo for equity investments

Lessons from Chinese bamboo for equity investments

Equity investment is like sowing a Chinese bamboo tree which grows only after 5 years 3 months
Jigar Parekh Jan 21, 2013
Equity investment is like sowing a Chinese bamboo tree which grows only after 5 years 3 months

Yesterday I was listening to one of the audio books where I came across the story of Chinese bamboo, which I must share with you.

Unlike other trees, growing Chinese bamboo requires lots of time and more of passion.  It takes 5 years and 3 months (almost 63 months) for Chinese bamboo to grow to the height of 80 feet. So, what’s so unique about this tree? 

At 80 feet, not just the height to which Chinese bamboo tree grows is unusual, but the way it grows is even more so.  For almost 5 years, you keep watering the place where you have planted the seed of Chinese bamboo on a daily basis without fail, but you don’t even see a shoot growing out of the soil. 5 years of watering and passion!!! Huh!!! That’s long time. Still during all this time, you see nothing but just a small sprout coming out of land which can be measured to couple of inches if you are lucky. In many cases nothing’s visible above the ground for 5 years. After 5 years you can see the first sight of the small green bamboo trying hard to coming out of soil, and that small bamboo which gave its first appearance after watering the soil for 5 years, grows to 80 feet in less than 90 days. Yes, it’s true. 

Sometimes the waiting period fluctuates from 4 to 6 years, but the sure thing about the Chinese bamboo is, it’s definitely going to start growing and once it starts growing the speed is definitely going to be unusual. It definitely will reach the height of 80 feet from ground zero, which is equal to an 8-storey building, in the short period of 6 weeks to 12 weeks.

There are great chances of person quitting the idea of growing Chinese bamboo due to the long waiting period. Everyone can find the soil and plant the seeds and also can start watering it, but when it comes to waiting, sooner or later many drop the idea. Only few who keep watering the soil consistently with full faith, can get the 80 feet high bamboo tree.

Equity investment is also like growing Chinese bamboo tree. One should have passion after planting the seeds. Now we all know that the Chinese bamboo tree takes a time to start growing but once it starts, it grows rapidly to 80 feet. The same way, in case of equity investment also we all know that after investing you should wait for long time but in practical world very few have got that patience to wait it out. 

Once your clients have invested in the most suitable equity mutual fund scheme identified by you, you have helped your clients plant the seed of investment by opening up the investment account. Now you need to ask them to wait... and wait.... and wait. You and your clients have to be very disciplined in watering the plant i.e. in regular investments.  In the beginning, neither the market nor your client’s investments could be moving anywhere. In fact, they could start falling and eating away the value of your client’s money. You still wait... And wait. Oh sure, you have been told by people that it takes a while to grow your client’s money into equity and you are also ok with that. Because you believe “waiting for while is surely going to pay you the premium”.

Year one is over and you and your client are entering the second year.  You are still watering but started becoming a little bit of sceptical about the power of your investment seed to grow. Anyway, you have heard about so many other success stories about many successful people who also invested in the same market and made their fortune. So you and your client kept on watering the seeds by regularly investing in it.

Now, it has been three years and you started wavering and doubting about your choice of investment seed. Some voice inside of you has started telling you that you are a special fool to believe into the something which was too farfetched. You start thinking about other possible seed which you might have planted instead of equity. You wonder why you had to pick up an equity investment only.  You start losing sight of your purpose and your faith starts to diminish…You decided to re-commit yourself for the entire third year.

Now you’re entering into the fourth year. You are becoming more disillusioned and are experiencing a deeper sense of doubt, regret, frustration and anger.  You started wondering,

“Is it when I invested was a wrong time?”

“Perhaps, my Luck isn’t strong enough for my investments to grow.”

 You were going crazy, because you’ve already spent a lot of time and invested a lot of money. So after the years of lot of dedication and effort toward this investment, you have decided to give it a chance for one last more year. 

Finally it is 5 years and you feel they were wasted because you kept on regular watering by investing into it every month, but alas! Nothing happened. So you decided to let your client QUIT. And the client withdraws his money with no or little profit, perhaps less than the interest of bank fixed deposit.

They day your client quits, the equity market starts taking small upward leaps, and you wonder what’s happening. Within couple of years the bamboo (equity category) starts growing rapidly and grows to newer heights but unfortunately you or your clients couldn’t get anything out of it.

Equity is just like the Chinese bamboo, it’s possible that it doesn’t give you any return for years but then in very small period of time it starts growing with the unusual and unbelievable speed which eventually compensate you and your client for all your dedication, passion and faith.

Looking at the history of the Indian market, whenever it has not moved upward for few years, it is always followed by a strong bull run that too in very fast speed. Take an example of the period, starting from Feb 2000 to December 2007. During this time the Indian equity market delivered a return of approx. 240% absolute (Sensex went up to approx 20,500 from 6000). But if someone entered into the market in Feb 2000 and kept on investing for some time would surely have got frustrated, as after almost 4.5 years, market gave no return. The Sensex was just 6000 in Feb 2000 which went down to 2600 and again in Nov 2004 it came back near to 6000. Now 4 and a half year is a long time, isn’t it?

Many investors quit the journey in between and thought it was their worst mistake ever to invest in the equity market. But after 2004 it started its nonstop journey and over the next 3 years it grew to over 20,000.

Equity market gave approximately 240% absolute return in a span of 7 years, but to get those returns, one has to plant the seed and wait for 7 years. Wherein, for the first 4.5 years, returns were either not present or negative.

Now let’s look at someone who planted the seed into the December 2007 and is waiting till now - he has not seen any sign of investment tree growing.  There is no sign of return (bamboo), so what? It’s definitely going to start sometime in near future, once it starts the speed will also be definitely unusual.

Be faithful and keep watering your Chinese bamboo tree.

Jigar Parekh is the Zonal Head - Alternate Channels, Prudent CAS

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