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A 65-year-old doctor, client of a Mumbai-based investment advisor, is an oddity in equity investment. At a time when stock movements are tracked by the hour and even the minute, the doctor's mantra has been to identify good stocks and then forget about these. "He buys and sits tight, irrespective of market levels, valuations or global cues. He does not sell, except when he has lost faith in the company management," says the advisor.
The doctor belongs to a rare breed of investors who practise legendary investor Warren Buffett's buy-and-hold strategy. Many, including market pundits, today acknowledge the efficacy of the strategy but it is rare to find investors actually practising it. Most prefer to book profits at every opportunity or exit within two or three years.
"Buy-and-hold is a wonderful strategy. It can meaning holding on to your investments for 20-30 years or even a lifetime," says Suresh Sadagopan, a certified financial planner. The idea behind it is a high-quality business will compound capital for a long time and so, the best time to sell it is 'almost never'.
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"If you pick 100 people who have really done well in the stock market over a decade or more, you'll find the vast majority of them are buy-and-hold investors. There will be very few successful traders in that group," says Sanjay Bakshi, adjunct professor at MDI Gurgaon, a business school.
Analysis of 20-year rolling-return data in equity funds shows if one invested in the equity market for a year, there would be a 38 per cent probability of losing money, according to Tanwir Alam, founder & chief executive, Fincart. However, the probability of losing money would decline to 27 per cent, 22 per cent and 15 per cent for two, three and five-year horizons. For a 10-year period, the probability of losing money is zero. "The equity market is a self-correcting creature; as long as you have time in your favour, you will make money," says Feroze Azeez, executive director and head of investment products, Anand Rathi Private Wealth Management.
Strategy
Experts believe a buy-and-hold strategy is possible if one identifies companies that are fundamentally strong, with a potential for steady, robust earnings growth. Look for a good business, the presence of a great management and buy when valuations are reasonable. And, remember, you might find such good ideas only once a year or even once in two years. "It's possible to find companies that you can hold on forever. It's not very complicated but it requires focus and a lot of hard work," says Bakshi.
"Buy quality stocks, mostly large-caps. Opt for only those mid-caps with a market capitalisation of more than Rs 1,000 crore," says B Gopkumar, head of retail broking at Kotak Securities. He reckons a top-down, rather than a bottom-up approach, is a better strategy. "Pick a sector and then select market leaders within the sector. Give up the habit of analysing stocks every month or quarter."
Buy-and-hold investors have to avoid the temptation to book small profits, especially when the stock has run up 100, 200, 300 or even a 1,000 per cent. "Sitting on profits is a lot tougher than sitting on losses, as investors are insecure about their profits," says Basant Maheshwari, author of The Thoughtful Investor. Adds G Chokkalingam, founder, Equinomics Research & Advisory: "Investors (usually) set a stop-loss and sell out if the stock moves down 10-20 per cent. Or they cut losses and sell when a particular stock recovers its original price. In doing so, they miss out on the big picture. Even great stocks correct or get hammered by operators. The key is to be patient."
Investors should not get too rattled if a few of their calls go wrong. "Don't worry about each and every investment and expect every call to go right. That can never be achieved," says Azeez. Remember, even Buffett has admitted to mistakes.
Practical points
Buy-and-hold might, however, not be prudent to follow at all times, however. According to Sadagopan, the best option is to align the investment with your goals. "If you plan to invest for your children's education, the horizon can be five to 10 years. For retirement, it can be 10, 20 or even 30 years. In general, irrespective of the goal, five years is a good enough time-frame to stay invested. However, don't get into equities if your goal is only two years away," he says.
Alam advocates segregating investments into long and short-term buckets: "If you have long-term money to invest, don't make the mistake of investing for shorter time horizon buckets. Remember, the markets will always be volatile and test both your emotions of greed and fear."
One can exit the investment altogether if the future prospects of the company look bleak. "Sell, if the quality of the business is impaired or likely to be impaired, the quality of the management is seriously impaired or if the valuation is so extreme that even under optimistic scenarios, the money to be made over the next five to 10 years is mediocre at best," says Bakshi.
Azeez believes there's a simple formula one can use to book profits in your equity portfolio. "If the trailing price to earnings multiples of Nifty and Sensex exceed 18 by three points, reduce equity allocation by 20 per cent. Keep reducing the allocation by 20 per cent for every three-point upmove," he says.
Some experts reckon a buy-and-hold strategy has become increasingly difficult to follow in the past 10 years, with the Indian equity market now more closely connected with global peers. "Today's world is a lot more dynamic and you can't adopt a 'fill it, shut it, forget it' policy. Information flow has increased tremendously because of the internet and, on a bad day, stocks can fall 40-50 per cent. Everyone's reacting to the same piece of news instantaneously, which magnifies the impact on stock prices," says Maheshwari.
Adds Chokkalingam: "The economy, the stock market and businesses are cyclical in nature, so stocks have to be monitored on a quarterly or six-monthly basis."
Bakshi strongly disagrees. "Market conditions will continue to change, as they have over the past several decades. But, the formula of buying good businesses run by good managements at reasonable prices will continue to deliver great investment results in the long term," he says.
That mantra, perhaps, more than anything else, has stood the doctor in good stead during the time he has stayed invested in the market. How else would you explain the 4,000 per cent rise in his wealth from Rs 5 crore to Rs 200 crore over three decades?
