Long term Investing


Every Investor dreams of outperforming the market and creating wealth like the legendary Investor, Mr. Warren Buffett. But it takes an enormous amount of discipline, patience and perseverance to be a successful investor. Most of the long term value investors recommend the ‘Buy & Hold’ strategy to investment. 

Buy and Hold is a long-term passive investment strategy where the investor is involved in selecting value stocks. Once the Investor identifies the right business, he locks it for the long term, thereby reducing taxes, increasing wealth and enjoying the benefit of compounding. 

Most of the investors bet on the overall economy. Fortunately, India is a developing economy and therefore, has caught the attention of many investment funds across the globe. The long term story of most of the stocks in India has been beneficial to investors. Buy & Hold strategy has, therefore been a boon rather than a bane for most of the businesses. 

Above is the stock price chart of TCS (since the date of listing). The stock has created wealth for its investors, and the value of investment today is more than 1600 times that of the original IPO price (adjusted for share-split and bonus).

In other words, if you had invested ₹1,00,000 in TCS in 2004, it would have become ₹14,40,000 (without considering the impact of dividend). TCS is the second largest company in terms of market capitalization listed on the Indian stock exchange.

Buy and Hold may seem to be a pretty simple strategy when you look at these 16 years at a stretch. Afterall one would have just held on to this stock all these years. But why is it that only a few were able to achieve much higher returns?

It surely isn’t the most straightforward strategy. For he who had done it, would have fought a hard battle and faced the following;

  • The temptation to sell after seeing handsome profits. 
  • Refrain from shifting to more attractive stocks.
  • Stock ticker tape, which made its presence felt every second.
  • Not bragging like his fellow investors who made an instant profit.
  • Sentiments of the market at the time of a bloodbath. e.g. the 2008 US Financial Crisis. etc. Avoiding panic selling.

This is correct. Identifying the right stock is just 50 per cent of the overall success. There are millions of traders sailing in the same boat, but their earnings tend to differ materially. Timing, price, time frame and temperament decides the returns from your investment as well. The long term growth depends on corporate earnings. However, the short term price fluctuations are based on sentiments. The earnings reported quarterly, but the price of the securities change every day. 

Did you know?

Warren Buffett is one of the most successful investors of all time. His shareholding list is available to everyone. Yet only a few could make a fortune like him. There may be many reasons for this, but it can be narrowed down to only one – ‘Unrest’.

There’s a famous quote by Blaise Pascal which says- All of the human unhappiness comes from one single thing: not knowing how to remain at rest in a room. This is one of the great lessons for an investor who believes in the power of long term investing. He would not only buy and hold but will look for quality businesses that would sustain through the toughest of recessions. Long term investing is all about understanding the value of the business and not the price of the stock. One who understands the difference between the value perceived and the price of the stock – can become a successful investor.

However, if it was so easy to make money in the long run, why are most of the investors not following the same strategy? Also, if the long term story is optimistic, does stock picking even make a difference?

Well yes, business dynamics change from time to time, and so do the emotions. The behavior of other investors and the market conditions affect the investment portfolio. In changing business environment, it is of paramount importance to regularly review your existing portfolio and look for forward-looking opportunities. 

And that’s why holding on to stocks – the ones that remain high quality – is elementary yet not as simple as it sounds. A profitable business today may or may not continue to stay profitable due to the business dynamism. 

Although Buy and hold have provided immense wealth to many, who follow it. But it has undoubtedly been a wrong choice for some too. This is the chart of wealth destroyer Reliance Power since its IPO.

This is the chart of Reliance Power. If you had invested ₹100,000 in Reliance Power in 2008, you would be left with mere ₹1600. 

Had the Investor reviewed the stock at regular intervals, he would have exited much before the crash and could have avoided erosion of capital beyond a point. In addition to periodic review, the Investor should also deploy risk management techniques to reduce the losses beyond a point.

How can one assure wealth creation in the long run?

As the business dynamics keep on changing, businesses may or may not remain profitable for the longest time. E.g. Automotive and fuel industry may become obsolete after the introduction of electric vehicles. 

A long term investor should review a firm’s viability, scalability and sustainability before making a decision. He should be well equipped with the fundamental changes with the company, i.e. change in management, business model, geographies, product range etc. These are some of the ways through which an investor could make a fortune in the market.

To conclude, Buy and hold investing can be thought of as sowing a seed into the ground and just watching it grow to the fullest. You may not get the fruit in the immediate future but will surely receive ample of them after a certain amount of time.

Why was StockBasket created?

Problems pave way for invention. Similarly, StockBasket was introduced to eradicate several problems of investors. Before trying to know why StockBasket was created, let’s dive into the major problems associated with investing. 

Problems of investors:

  1. Wealth destruction strategy: Many investors are unaware of the fact that only less than 20% of stocks are good quality stocks and the rest accounting around 80% stocks don’t beat the expected returns. Here is the study of  the StockBasket research team: 

Many investors fall prey to investing in wrong stocks due to lack of knowledge or inadequate research and hence they walk on the path that ultimately leads to wealth destruction.

2. Churning of portfolio: It has been found out that investors churn their portfolio way too much. The average holding time for investors is just 2 years! Due to this, investors don’t benefit from the power of compounding. 

Introducing StockBasket

SAMCO presents StockBasket – India’s first buy and hold investment platform with an objective to create long-term wealth.  

StockBasket research team has handpicked excellent quality stocks with its authentic research based on its proprietary framework of over 25 parameters of evaluating stocks.

StockBasket is a basket of expert-curated stocks designed for long-term wealth creation. With reasonable diversification of stocks of around 6-20 good quality stocks in one basket to produce optimum returns for you.

StockBasket is designed with a minimum investment horizon of 5 years so that retail investors don’t churn their portfolio and enjoy the benefit of compounding in the long-run of investment. 

Who should invest in StockBasket?

There are many retail investors investing in quite an unorganized way. They ultimately fall prey to investing in wrong stocks that can potentially harm their wealth creation. Also, such investors churn their portfolio too much and hence they miss the benefits of long-term wealth creation

StockBasket is created with a principle that every investor whether he’s big or small, should have access to wealth creation via the Stock market and invest in an organized way so that they don’t lose wealth. Enlisted below are the profiles of our retail investors and their needs:

·       A long-term investor, who knows wealth can only be created by staying invested in quality stocks for a long period

·       A student, who wants to make an investment for the first time.

·       A salaried professional, who started working a few months or years back and has saved up some money to invest in a good and safe asset class.

·       A seasoned investor, who has created some wealth in equity markets and understands the nitty-gritty of the stock market.

·       A senior management professional, who does not have the time to track markets but wants to create wealth in the stock market.

So basically, StockBasket is for anyone and everyone who wants to invest money for the long-term and create wealth.

“Compound interest is the 8th wonder of the world. He who understands it earns it….He who doesn’t pays it…. ” – Albert Einstein 

“My wealth has come from a combination of living in America, Some lucky genes and compound interest.”- Warren Buffet

The power of compounding is really important to understand if you want to make a lot of wealth. Warren Buffet arguably the most successful investor of all time is a great believer in the magic of compound interest. He has been preaching this for decades, which has made him a billionaire. He goes onto say that compound interest over a period of time can do extraordinary things. Take a look here for an example at Buffets net worth.

Net Worth of Warren Buffett

 The majority of his wealth has been accumulated in recent years. Going from $3.8Bn when he turned 59 to currently to a whopping $82Bn when he turned 89. This is the snowball effect. It is the rolling of a snowball down the slope on a snow-covered hillside. As it keeps rolling, the ball will pick up more snow gaining more mass, surface area and momentum as it rolls along. It is a process that starts from an initial state of small significance and builds upon itself, becoming larger. This shows the effect of compounding. 

Compound interest just means you earn interest on your interest. At a 10% a year simple interest, you earn Rs 1,000 on Rs 10,000 every year and have Rs 1,500 after 5 years. If you allow the interest to compound, that 10% compound interest gives you Rs 1610 after 5 years. It’s like you earn an extra year of interest. You don’t do anything but let your money work for you. As your money keeps working for you, it keeps gaining momentum and size. The more time it compounds, the larger it becomes. 

Now coming back to the example, If you invest at 10% compound interest for 5 years, your wealth increases by 60%. But if you invest at 10% compound interest for 50 years, your wealth increases by 11,639%. That’s a lot of wealth. All it takes is 10% and 50 years. The problem is many of us don’t have 50 years to retire. Therefore to take a larger benefit of compound interest, it is better for you to start as early as possible. 

Traditionally if you invest in stocks, you want the stock price to rise but the value of the portfolio will increase linearly to that rise in stock price, i.e if there is no compounding going on. If it’s a dividend-paying stock, you can more shares going along as you keep investing these dividends into the company. These results in compounding and those extra shares keep earning more and more money. The single biggest mistake that individuals and investors make in their life is that they don’t reap the full advantage of power of compounding. It is easy to understand this concept but very few people can actually implement it and reap its benefits.

Let’s take another example of 2 people Peter and Henry. Peter starts investing when he is 20 years old and just takes little bit of his money, locks it down and sets aside to invest it. Lets say he takes out Rs 20,000/month, which is 2,40,000/year and invests it in the stock market. Overtime he averages 10% returns post taxes. Let’s say he makes that investment till the time he is 40 years old (therefore he invested for a total of 20 years) and after that he did not invest a single rupee till he turns 65 years old. On the other hand Henry does not get started when he is 20 years old. He waits till he is 40. Let’s say he starts putting in the same amount of Rs 2,40,000/year, averages the same 10% return post tax and invests till he is 65 years old. He invests for a total of 25 years, therefore has put in more money in the system than Peter. 

At the age of 65, who do you think is doing better off? I know you know the answer, but the real question is how much better off. Peter who started earlier and quit earlier, who also invested for a lower number of years has 600% more money than Henry. At age 65, Peter has accumulated around Rs 14.89 crore, whereas Henry has accumulated around Rs 2.36 crore only (after having invested for 5 more years than Peter, the only difference being Peter started out early and let his money compound for a longer period of time).

I advise you all to start out your investment journey as early as possible to reap the benefits of compounding. To do this you can visit the Stockbasket application and buy a basket/portfolio of stocks specially made by research professionals just for you. You can choose your investment options from a variety of baskets available depending on your investment goals.

“Our favorite holding period is forever.”

Warren Buffet

How long should you hold a stock? Buffett says if you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes. The benefit of long term investing in stock market is unparalleled, provided that investments are made in fundamentally strong companies with a good business model, sound management and growth visibility. Staying invested in the market over the long term has historically paid off. Let’s look at these benefits.

Cost effective:

Most of the market participants blow up a huge amount of money in commission, brokerage charges and various taxes by continuous trading in stocks. The more you trade, the more charges are triggered. Long term Investors will save on all these costs as it naturally leads you to transact less often. Every rupee saved can be further added to your investment capital, which makes long term investing very powerful.

Power of compounding:

“Compounding is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it” – Albert Einstein. The element of compounding comes into play during long term investments when your investments produce earnings through dividends, stock returns etc, they get reinvested in the stock and can earn even more. The more time you’re invested in a stock, the power of compounding gets larger.  Your investments can grow exponentially over time.

For example, let’s take two people, Ram and Shyam, who have the same starting balance say Rs 1,00,000 each. They both decide to buy same investment on the exact same day and earn the same interest of 10%. They both plan to hold their investment for 30 years. Ram plans to withdraw the interest at the end of each year, while Shyam plans to reinvest the interest and let it compound. Let’s fast forward 30 years and see the difference in the potential returns. Ram who withdraws the interest, would earn Rs 10,000 per year. Over 30 years, his earnings would have amounted to Rs 3,00,000. But let’s see how much difference reinvesting would have made. As shown in the chart below, Shyam who reinvested the interest would earn, Rs 16,44,940 above his initial balance which is more than 5x of Ram. This example illustrates the power of compounding. Long term investment takes advantage of the power of compounding and maximizes your returns.

Highly effective:

Long term investing works because it makes you focus on things that really matter. Long term investors will look at the core fundamentals of the company such as growth prospects, performance, management competency, etc and not look at the day to day fluctuations in stock prices. Over the long term, price movements tend to normalize depending on the performance of the business. Historically, these factors are much effective to predict future returns.

Removes the short term volatility out of the picture: 

The stock prices may show very high volatility, i.e, fluctuations in prices in the short term but maybe growing over the long term.  These fluctuations tend to confuse the investors as emotions take over leading to rash decisions.

The stock prices never go in one direction continuously without any fluctuations. As you can see in the above chart, there are several upward and downward movements in the price, but looking at the larger picture the stock is trending upwards. Long term investing helps investors ignore these short term fluctuations.

Requires Less time:

Long-term investing requires less of your time. Your work is done when you buy a stock which you think is of high quality and will maintain its competitive advantage over the years. All you have to do is to check periodically whether the company is performing well. Trading and short term investing require one to give full time and efforts to it.

No need to time the markets:

It is very difficult for someone to predict when to enter & exit the market consistently and accurately over various businesses or market cycles. You would be much better off to stay invested in the markets. Investors who try to time the entry and exit points tend to underperform the ones who stay invested throughout.

Fulfilment of long term goals:

Are you saving up to buy a house, fund your retirement or your child’s education? Long term investment is the way to go! To prepare for a high cost future, you should cut down your current costs and invest that money for the long term. The earlier you start, the compounding effect gets larger. You must be thinking which stocks to invest in for such long periods and whether the companies will still have strong fundamentals 5-7 years down the line. StockBasket is a product that will take care of this for you. It is a basket of high quality stocks, carefully chosen by experts. It helps you stay invested for the long term, without worrying about anything else. It keeps track of the portfolio and makes time to time changes if necessary Investors can choose amongst various baskets such as ‘Retirement in 2040, ‘4x target in 10 years’ depending on their goals and investment horizon.

Warren Buffett, the man who needs no introduction to my fellow investors. He is known for his investment philosophy and modest lifestyle till date. Presently, he is the Chairman and CEO of Berkshire Hathaway and has a net worth of around USD 85 billion (Rs. 6.10 lakh crore). Currently, Buffett stands at no. 4 on the richest people list. The exciting part that appeals to people is his ability to consistently beat the stock market for over 50 years, using what many people see as simple investment techniques.

(Source: https://www.berkshirehathaway.com/letters/2018ltr.pdf)

Buffett made his first investment in a stock at an age of eleven (‘I was wasting my life up until then.’ when he was asked about his first investment). He bought his first stock at USD 38 a piece. He started to panic when the price declined to USD 27 soon after buying. He promptly sold his holdings when the price rebounded to USD 40. However, the stock then shot up to USD 200 soon after he sold them. This experience taught Buffett one of the fundamental lessons of investing: patience is a virtue.

Buffett at an age of 19, read both The Intelligent Investor by Benjamin Graham and Security Analysis by Benjamin Graham and David Dodd. These books, to date, are considered a Bible for investing community. He applied to Columbia Business School, due to the fact that both Benjamin Graham (father of value investing) as well as David Dodd were members of faculty there. Buffett was a successful student and this gave him an opportunity to directly work under Benjamin Graham’s partnership firm. He enjoyed working with him at the core. He later claimed that working with him gave him valuable experience of a lifetime. 

Buffett Partnership Years  

After his stint with Graham came to an end, Buffett started setting up investing partnerships and the most important one was Buffett Partnership Limited (BPL). As an obedient student and disciple of Graham, Buffett run partnerships focused on ‘Bargains’. These were companies that traded at a discount to the value of their net asset. This is also popularly known as ‘Cigar-Butt’ approach. In this approach, Buffett purchased a large stake in bargains and waited for market sentiments to improve. Improvement in market sentiments would drive the share price up and the bargains could be sold for comfortable profit. Buffett also used his holding in these companies to try and speed up the process of extracting value. One-third of the BPL’s portfolio was also invested in what Buffett called ‘workouts’. These companies were in the process of being taken over by another company and giving him merger arbitrage.   

Soon, the stock market started to become too expensive. Buffett’s probability of generating above average returns and cigar-butt style of investing was turning increasingly difficult. So, he decided to wind up BPL.

During his partnership years, Buffett would write a letter to his partners every year. These letters would convey his investment rationale, philosophy along with partnerships performance. These letters (Buffett Partnership Letters) are available in the public domain and are a must read for investors. 

Berkshire Hathaway Years       

Buffett started focusing on Berkshire Hathaway, a textile manufacturing company. He originally bought it as a value investment (bargain) in 1964. He then realised that the company was getting stiff competition from domestic as well as foreign plants and did not have any future. So, Buffett turned Berkshire Hathaway into a holding company for his investments which he operates as a hedge fund. 

Expensiveness in stocks made Buffett to shift his philosophy from the idea of bargains to stocks that were merely cheap and had wonderful business prospects. Understanding the changes in the economy, he currently has adopted a philosophy which believes that ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price’. Buffett’s strategy on investing in a wonderful business at fair price is built on staying away from anything that seems complicated. He says that it is most important to know one’s circle of competence and to stick with it. He added that the size of that circle of competence is not very important, however knowing the boundaries is vital. Understanding and sticking to his own circle of competence favored him to stay away from technology stocks during the maniac technology boom popularly known as the ‘dot-com bubble’ from 1995-2001. He focuses only on companies which are easy-to-understand businesses for him like insurance (GEICO). GEICO generates large amount of consistent cash flow that he reinvests in Berkshire Hathaway. 

Even though we see that Buffett revised his investment philosophies a couple of times. But he, never inched a bit from the philosophy taught by Benjamin Graham: ‘Price is what you pay, Value is what you get’

Warren Buffett has placed a great deal of importance on investing in companies having ‘moat’. These are companies with an advantage, legal or operational which prevent competitors from entering and affecting margins of business. He has developed an expertise for looking at businesses as a whole and chooses companies solely based on their overall potential. He is seen holding companies for long-term and seeks ownership in quality companies only. These companies are capable of consistently generating free cash flows. When Buffett invests in a company, he is hardly concerned with whether the market will recognize its worth. His only concern is how well the company can make money as a business. Buffet also concentrates on buying companies outright as buying these companies outright allows him to keep his portfolio relatively concentrated. He is known for his early investments in companies like See’s Candies, GEICO, Coca-Cola, American Express etc. which was based on his circle of competence.  

He continues his legacy of writing at Berkshire Hathaway too. He writes to his shareholders every year as Shareholder Letters. These letters are full of wisdom (that nearly anyone can understand) on various topics such as investing, money, life and much much much more. These letters occupy a very special place in business and finance. 

What should I learn? There is an ocean of wisdom with this billionaire investor. Few things that I would love my reader to inculcate in their investment philosophy are to start investing (very) early, (always) invest in wonderful businesses with economic moat, and invest keeping long term horizon in mind (without fail). This would help investor’s start their wealth compounding journey in the right direction.  

And lastly, for Warren Buffet fans/ disciples, CNBC.com has created ‘The Warren Buffett Archive’ which is the world’s largest collection of Buffett speaking about investing, money, business and life.

I am sure you’ll love it. 

That’s all for now.

Until next time.


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