There are many myths and beliefs chronicling around long-term equity investing which are not true. Let’s debunk few of them. A small disclaimer: These principles apply to wealth creation and not wealth management which is normally the focal point of many messages sent to you.

No. 1: Warren Buffett does not hold his stocks forever:

It’s worthwhile to note that it is Warren Buffett’s ability to identify and stick to the solid stocks that have made him one of the greatest investors of all time. Warren Buffett had invested $5 bn in Bank of America in 2011, which is now worth more than $14.2 bn. He invested in Coca-Cola in 1988, post which the company witnessed the downfall in its stock price. This downfall could not deter his conviction in the long-term growth potential of the stock. The end result? His investment in Coca-Cola in June 1988 soared from $2.45 to $43 in June 2018. Here is a list of few of his long term investments that grew leaps and bounds over the longer run:

Name of the stockAnnual Average Compounded ReturnTotal ReturnYears Invested
PetroChina52%720%5
BYD41%671%6
Freddie Mac24%1525%13
Wells Fargo21%9417%24
(Source: Fortune.com)

 

In fact, if one may look at his portfolio of top 15 stocks as per his shareholding as on 31-03-2018, the longevity of around 9 stocks is more than 5 years. Even while talking about his short-term investments, is it justified to follow that strategy without understanding the investment rationale behind the exit?

Our Wealth Creation Strategy first identifies the high-growth potential stocks that can help you amass significant wealth over a long run. We also dig deep into the reason behind the price downfall before taking a long term investment decision. Click here to read about our blog on possible triggers behind the stock crash.

No. 2. Equity as an asset class gave the same returns as compared to other asset classes:

Gold prices and Sensex Index were hovering around levels of 4,000-4,500 in 1994. While gold price may be approx. 32,000 and Sensex at 35,000 today, it is not justified to compare this absolute value. Equities is a game of identifying high-growth potential stocks. There are many stocks like CEAT which grew 14-15 times in just 5years whereas stocks such as Maruti Suzuki grew approx. 50 times since 2003. Well, there are hardly any wealth creation stories by investing only in gold, real estate or fixed deposits. The benchmark BSE Index is a non-linear curve with bouts of depression and growth. Hence a CAGR of 10.5% over the last 25 years does not give you the complete picture of the potential of equities in the long run.

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No. 3. Market price tells you the complete story:

There are many raised eyebrows when we talk about wealth creation story by investing in Wipro and Havells. Many compare the absolute market price of Wipro in 2000 to that of today. It is worthwhile to note that investors enjoyed CaGR of 7% and above if they invested in the years from 1998-2003, except for 2000 where the company delivered low CaGR.

PeriodStart PriceJune’18 Market PriceCAGRAbsolute upside
15yr46.7252579.93%450.0%
17yr69.2582577.56%271.1%
18yr142.552573.33%80.3%
19yr4125710.74%526.8%
20yr17.34825716.16%1381.4%

The aforementioned company has also announced four bonuses, has been paying dividends every year and is backed by visionary and credible management. Looking at just the absolute share price of any company for a particular year and comparing it with today without considering growth prospects, management credibility and vision, risk management process, corporate actions including dividends, etc. may help you to gain 10-15% in the short-term, albeit at the cost of multiplying your wealth by 5x-10x or even more over the next 8 years.

No 4. Buy and rotate strategy is the need of the hour:

This certainly works best, albeit comes with high churning rates and therefore high brokerage fees. With a basic knowledge of value investing, one knows that everything boils down to buying businesses that are undervalued as compared to their intrinsic price. But can you identify such stocks only by looking at its near-term growth prospects? This negates the number 1 rule of value investing i.e. buy solid businesses that have strong moats at a low price with a view of a long-term.

No. 5. Timing the market is possible:

To be really able to buy and rotate with a precision, you need to master the art of timing the market. Timing the market is against the basic tenets of value investing, and no one has been able to master that art till now. We are sure even Warren Buffett would agree on this!

Not all stock market investment have same growth-prospects and neither may be sound. The key lies in identifying stocks with a high margin of safety, and that is where the principles of value investing come into play. While we look at the businesses growth for the next 3-5 years, this is not achieved only by screening the financial statements of the company. Exhaustive due diligence on the qualitative aspects needs to be done to hold a high level of conviction on the growth prospects of the stocks over a long run. This makes investing more of a psychology game along with the science.