Long Term Investing – Don’t Create Your Missed Opportunity

investingIn last one year or so, how many times have you heard and read that “Buy and hold investing is dead”. I bet it is numerous times. I am willing to bet even more on the fact that almost 95% of 30 year old or below will make you believe buy and hold is dead and it does not work. And the examples cited are turmoil in 2008. In addition, the business media and brokerage houses will add fuel to this fire. Well, if they do not encourage you to trade, how will they survive? how will they get their commissions?

To me all these 95% of folks are “creating their own missed opportunity”. Twenty years down the line when these same folks look back on “today”, they will realize they missed an opportunity. They missed this opportunity because of their quest to make that quick buck in trade, the lack of real knowledge, lack of awareness, and lack of foresight, and not able to think what is important in investing.

  • Many individuals claim to be followers of Buffet and Graham, but they do not really understand their investing process. Buffett advises index investing for individuals, Buffett is proponent of holding forever, Buffett focuses on intrinsic value, Buffett focuses on averaging in and out, Buffett focuses on understanding the business. And all of these Buffett fans ignore this. Ironical!
  • Many individuals say they are long term investors. But their investing horizon is one year, two years, or three years. For them investing ends at three years as if businesses will stop to exist after 3 years. Ironical and intriguing.

Long term investing is about growing with the business. It is about investing in the business. The expectation in long term investing is that once you invest in a company, you are looking for management to keep increasing the “value of its business”. You are expecting management will use prudent financial management to increase profitability, share some percentage of profits, and at the same time keep growing. As the company or business grows the value of your holding grows. Your wealth grows. In order for this to happen, one need to be patience, one needs to keep track of how the company/business is performing. And this takes time.

Unfortunately, and for some strange reason, this “longer time” gets equated to the long term investing. And that is a losing preposition.

Look back at any SENSEX company or any NIFTY company, where they were 10 years ago, and where they are today. You will realize how they have grown. Just look at how their book values (not stock market price) have changed over the years. You will see value growth is in order of magnitude (and not few percentages).

The companies that have good growth, good business operations, good products, etc., their “growth in value is permanent”. Even if market dynamics brings it down for short duration, it is generally a temporary event. If the company’s fundamentals and balance sheet is strong, it will come back even faster.

Therefore, by not thinking long term, individuals are creating their missed opportunity.









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30 Responses to “Long Term Investing – Don’t Create Your Missed Opportunity”

  1. You are correct. I am 31 now and i was thinking that Buy & Hold is dead, until last month I wrote to a company about my holding in physical form. They came back & i was shocked that QTY of the stock i bought in 1998 was increased 15 times by bonus & splits.. and the investment of 12k was 12lacs today. I could not sell because in the mean time i lost physical certificates, changed address etc.
    Obviously i will never sell that stock.. but will hardly try buy & hold again..

    • TIP Guy says:

      Hello MIP,

      With that level of exorbitant returns (12k to 12Lacs) in 10 years!!!, and you would still not try buy and hold.

      I am assuming, you expect to beat that by churning? Am I right?

      Best Wishes,

  2. Gurdial says:

    Hi,

    Wow!, 12k to 12lacs in 10 years that’s almost a return of 60% per year. How is that possible? Now I`m really interested in ” Buy and Hold” strategy.

    • TIP Guy says:

      Gurdial,

      That is not new. I have similar returns in my portfolio too. Unfortunately, these things will never get highlighted in media, because it does not generate the fees/commission revenue for brokerage houses.

      Brokerage and mutual fund houses encourage trading and highlight only quick success (once in blue moon). Because that’s what generates revenue for them.

      For sanity check, go figure how many traders are well know vs. how many long term investors you know…..

      Best Wishes,

  3. Gurdial says:

    So let me get this straight,lets say I was to buy some share like NTPC or IDFC and hold it for 10 to 12 years, I could expect a fantastic return?

    Till now, whatever money I have made is through churning. Never held a stock for more than 2-3 years.

    Thanks.

    • TIP Guy says:

      Gurdial,

      Holding a company share for indefinitely does not provide assured returns.

      It is important to hold companies that are fundamentally strong i.e. companies that have good cash flow, keep increasing share holder value, have and sustain competitive edge, management executes year after year (not just in one year or so).

      Long term buy and hold investing (or holding share for long time) is not about cashing in and out. The key is the company keeps increasing shareholder value year after year. At the same time, while you are waiting and trusting management they should keeping sharing some percentage of their bounty (dividends) with shareholders.

      Every year one has to make sure that they understand how company is executing, or are there signs for not going in right direction.

      Hope this helps!

      Best Wishes,

  4. Ok. Let me disclose that i hold ITC bought in 1998 @35 a piece. The split 10:1 & bonus 1:2 made my holding increase by 15 times. I have recovered thrice amount of my initial capital in dividends alone. Thanks to the lost certificates, so that i am still holding it. 🙂

    TIP, Rohit Chauhan is looking for some automated tools to maintain his blog. You are maintaining your site very well, So you may help him. In turn he is ready to manage portfolio / give service…

    regards
    MIP

  5. Yes, TIP, it’s 1:10. Thanks for point that.

    regards

  6. Arun says:

    The key, as Tip points out is, to periodically review if the company is doing the right thing, year after year. ITC gave fantastic returns. But there’s also Aravind Mills, Colgate etc, that have actually diminished value over the last 10 years. So – buying & holding indefinitely is no guarantee of returns.
    In one of an old articles in 2000 by chetan parikh, he was disucussing the price of Infosys [ if I remember correcty] being too high back in 2000. I think the argument was something on the lines of ” no tree can grow to the sky”. I have personally held supposedly good stocks for long periods and have experienced both significant appreciation and capital destruction.

    • TIP Guy says:

      Arun,

      Think for a moment: “no tree can grow to the sky”.

      If someone expects a tree to grow to the sky, then he/she is probably nut case! OR coming from a different world 😉

      Best Wishes,

  7. Hello Arun,

    “no tree can grwo to the sky”, but if nutured a tree can keep giving fruits for 25 years or more. Grow mango tree and not grass (which only looks good and does not give anything). I hope you get it.

    TIP Guy: how do we make sure weather company is “going in right direction” is there any parameter to measure it, how do you do it. Would like to know your thoughts.

    Thanks in advance.
    Krish

  8. Arun says:

    Krish –
    Yes- completely agree with you. Without appearing to berate the point, I was referring to companies like Colgate/Aravind Mills/nocil – one time trees that had borne fruits for many years before becoming “grass” ! 🙂
    Yes, Tip – what is your thinking about identifiying tree which are withering?

    rgds,
    arun

    • TIP Guy says:

      Arun and Krish,

      A tree will not become grass overnight (unless someone cuts it or burns it or gets uprooted in cyclone). All companies show signs of withering for few years before dying. There are multiple ways to identify withering such as trends in profitability, debt, revenue, products positioning, etc.

      Arvind mills and Nocil: If an investor decides to hold it indefinitely and then say it destroyed capital, it is investors mistake. Those did not become grass overnight. In my opinion, both of them have been in mess for a while. Investing is all about personal responsibility. If they kept destroying capital, why did an investor kept hanging on to it. Keep it simple, accept the mistake, learn, and move on. Investing successes is never 100%.

      On Colgate, i have difference in opinion, it is still a good company.

      Now how you measure your returns will define your total return. The dividends Colgate has paid over the years far exceeds what one would have invested 10 years ago. But if one decides to look only at share capital value, yes, then your are right. It may “appear to” have destroyed capital.

      Unless the tree gets cut or destroyed, it would have given you steady fruits for so many years. But if you choose to ignore those fruits as part of your total return, and focus only on dead wood (after 25 years) yes you will feel it destroyed your capital/wealth.

      Its all about how one looks at it or how one chooses to look at it.

      Best Wishes,

      • Arun says:

        Hi Tip,
        I think you are violently agreeing to what I said – a periodic review of the investments made is the investor’s responsibility. My question was, what are the early signs of the withering of investment? Is it
        a) a trend of reducing dividends
        b) Reduced CF/NP
        c) something else?

        Coming to the observation about trees & sky – which everyone seems to love to hate 😉 . That comment was made by a very astute mind [Chetan Parikh], not a nutcase about a very respected company [Infosys]. Applying it to MyIncomePortofolio, it raise the question – can his ITC holdings grow to 12 crores over the next 10 years? And 1200 crores over a further 10 years. Possible, but what is the probability? Then the question arises, what is the point the investor gets off? YEs, the invetor has made his returns many times over that period – but yet, there is capital to be protected- what is that tipping point where he withdraws the capital?

        Rgds,
        Arun

        • TIP Guy says:

          Arun,

          You are a funny guy (violently agree? Anyways…

          I think the signs of withering should be based on individuals objective. For example, in my case, I look for expected return + dividends. I have my method of evaluating it. If a company starts falling (in the context of my process), I should be willing to get rid of it. And I did mostly recently with GE Shipping.

          similarly, if somebody bought it with the expectation (or objective) to sell it when it reaches intrinsic value (or 30PE ratio, or BV becomes twice, or anything else), then the investor should get rid of it. That’s the way I would approach capital preservation.

          Basically, measure against your own objectives and metrics.

          Coming to your favorite example: Did I say Chetan Parikh asked that question? In my book, Chetan Parikh merely answered the question and instilled the sense of reality. He did not ask that question. Because he does not expect a tree to grow to sky.

          or Did I direct my comment to “someone who expects a tree to grow to sky”. I will leave for your to interpret.

          Once again, thanks for your spirited comments. I enjoy the discussion.

          Best wishes,

  9. Arun says:

    Hey Tip.
    Thank you, too, for the patience. Hope the other readers enjoy too, the spirited discussion – aah, its Friday evening & what better day & time to think of spirits!

    I think I (finally) got your point. Sell when your objectives are met, or you believe the price exceeds the value.

    Now the Chetan tree, cant get away from that, can we? Yes, he made that statement- which is as simple as it is profound. Clearly our ITC-investor needs to think when he has to sell. And speaking of nuts, surely we’ll need those to go with the spirits on this friday evening!

    Speaking of which I own Tilaknagar – maybe you can post on it sometime.

    keep up the excellent blogs. They are really great & I thoroughly enjoy reading them and learning from them too.

    Rgds,
    Arun

    • TIP Guy says:

      Arun,

      Based on my screen, Tilaknagar does not fit into my criteria. It does not warrant additional time or analysis because of following:

      – Negative operational cash flow for four years out of last five years.
      – Debt and liabilities has increased twice in last one year
      – If operational cash flow is negative, where is the company paying its dividends from? Is dividends being paid because promoters have ~74% stake?

      These issues stops me from going beyond this.

      This is not to say, Tilaknagar is a bad company. It may come out good on some other criteria. It just does not fit into my portfolio requirements.

      Best Wishes,

  10. Deepal says:

    Hi TIP Guy,

    so based on the discussion so far, it means get out when ones objectives are met. if objectives are based on X% profit or Xprice, isn’t is similar to trading? If yes, then what’s the difference?

    Thanks.
    Deepal

    • Arunsg says:

      Time & dividend – that’s the difference.

      This discussion is all about dividend investing, right?

      Assume your stock doubles in 6 months, and you sell – thats a trade. And, your objective was capital appreciation in the first place.

      It hits that in 3 months and you sell- its a killing. Same objective again – capital appreciation.

      It hits that in 5 years and then you sell; but in the meantime, you also collected maybe abother 50% via dividend. That’s dividend investng. And the reason you sell could be the deteriorating financial condition of the company, or the fact that your objective of capital appreciation is met, but you dont see further doubling in the next 5 years and 50% dividend too.

      Tip guy – tell me I’ve got it right!

      Cheers,
      Arun

      • TIP Guy says:

        Hello Arun,

        Your discussion is drifting to another topic. So to avoid confusion I will stop here. But you can read the my response to Deepal.

        Best Wishes,

    • TIP Guy says:

      Hello Deepal,

      I do not think I said “it is not trading”. I also don’t think I mentioned anything about trading vs. investing.

      Folks here are getting dragged into different subject. The discussion was about “how to identify a withering company?”, “how to save capital”. It doesn’t matter whether trading or investing, preserving capital is always of prime importance in both philosophies. Getting out when it has met your objective applies to both philosophies. And that’s one way to preserve capital.

      Now objectives can be anything. In my view, following is the difference…..

      Trading: Your objective is market price based (without any rationale of company or business). The thinking here is limited to your own personal cost basis. Here you do not care what happens to business. All you care is when it reaches a particular price point.

      Investing: Your objective is based on company/business perspective, book value or intrinsic book value perspective, growth in book value, etc. Before exiting you think about your future expected return. If the company continues to give same level of growht in BD/IV or anything else, then you are not likely to exit. To exit you need another opportunity with same level of expected return. Its about capital allocation. It’s about growing with company. In general, these things do not change in matter of few months. It’s the market price that changes in few months. If you cash out your profits (based on market price), you think of how to allocate this capital to another opportunity with similar level of expected returns.

      In this investing scenario when one is waiting, the question was how to preserve your capital. How do you identify a whither company. And that’s where there above discussion got drifted towards meeting objectives. And it is getting mixed with trading and investing.

      Hope this helps!

  11. Vikrant says:

    tipguy, i read all the 23 comments, one thing is for sure that you know how to pull back to the topic and not get diverted by others.

    you have mentioned on multiple places that the company does not fall down overnight (this is regarding holding the stock for right time) and yu gave a example of GE SHIPPING, i am still not clear as how would one know that the company is not doing bad and its time to exit, I know you have given some explanation above but i am still not clear on that, Are there any parameters or thumb rule that you should be looking at?

  12. Vikrant says:

    forgot to mention, what method or paramaters made you exit GE SHIPPING, and do you monitor yorr stock on a daily baisis, how oftern do you monitor your stock.

    • TIP Guy says:

      Hello Vikrant,

      what daily? are you nuts? I would have gone crazy if i had monitor daily.

      I read on and off about companies I have invested in. Again not stock market, but related to any news articles or press releases.

      I keep an cursory eye – on quarterly results, again looking for gross impact (and not few percentages here and there).

      Once a year I do serious portfolio review, like I am doing now.

      Best Wishes,

  13. prasad.b.s says:

    hello tip guy, i recently added to blog area,i am planning for long term investing in stocks with a horizon of 10 years, exit in between in few stocks may happen as u have suggested the company valuation etc,and can u tell me ,if i get any dividend from a stock,can i have option of reinvesting it in stock without actualy the fund not coming to my bank account (like dividend reinvestment in mutual fund)

    • TIP Guy says:

      Prasad,

      No, I am not aware of such a procedure. I think it does not exist in India (it does exist in US, brokerage house provide free re-investment capability).

      I do not use it because, a company could be over valued. So why would I re-invest in a over-valued shares? I let all of my dividends accumulate and buy something else at lower valuations!

      Best Wishes,

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