As equity investors, we have been fed on over-dose of long term investing benefits, compounding wonders, those 16% kind of returns y-o-y on BSE Sensex, all Richie rich stories from the developed world etc. It’s very easy for me to do a post on any of these topics loading you with quotations from Buffett, Graham, Munger etc. Then you would find many stereo type equity blogs talking about legends who professed “Hold it forever” kind of approach if you get hold of a good quality stock.
I want to however begin the year 2014 on a more sober note with some hard questions. The question is does it work in Indian context? Does your portfolio beat retail inflation rates?
Now see this link from the Business Standard with the headline – “Many blue-chip stocks fail the inflation test” - The marquee names include Colgate, Hindalco, three Tata group companies (Tata Steel, Tata Global and Tata Chemicals), Ashok Leyland, SAIL, BPCL. Investors in these and many other stocks would be surprised to find that their returns have been trailing retail inflation rates. Sensex itself has given returns of 2.11% CAGR net of retail inflation over the 20-year period.
This thought is certainly very disturbing for all advocates of long term investing in Indian equities.
Point # 1 is if 20 years is not the proverbial long term, then what is? In any case we have seen in last 5-6 years of recent market memory that returns in many so called blue chip stocks have been stagnating or even negative. So merely giving “time” to stocks is not enough. Just allowing businesses run their course and doing SIPs may or may not work. Don’t be blind about the process you are following. Your current SIPs in Infosys, TCS, ITC, Asian Paints etc may or may not be able to beat the inflation in 2033, who knows…
Point # 2 is stocks like Colgate, Hindalco and Tata Steel are quality businesses from respectable business houses if you are looking at a multi-year cycle that is long enough to smoothen out the effects of cyclical industries like metals.
Point # 3 is we are talking with survivorship bias. Actually, this is the most significant aspect for me. In other words, we are talking only about those businesses that have survived all these 2 decades and still not been able to beat the high retail CPI inflation that is prevailing in the country. On top of that, these are marquee names in India Inc. These are not some down the road type of companies where the odds of beating the average returns would anyway have been low.
Point # 4 is the real purchasing power in hands of the shareholders in these companies has been diminishing when they intended to preserve or enhance it in their retirement years. That was the central idea of such long term investing horizon in first place, right? But believe me, none of the institutional or PMS guys would highlight such hard questions lest their income & interests get impacted.
Ok, what do we then do?
That’s the logical question – what do we then do? Go back to fixed income securities and good old bank FDs. No, that is not the answer. By no means that is the problem diagnosis or the prescriptive remedy to cure the ill.
Equities, in my view, are a great way to enhance your purchasing power (net of inflation) provided you are reviewing what is happening to the business on a regular basis. Watch it every quarter, monitor the results, and check whether things are working out for the business and fundamentals are supportive of your investment thesis or not. My humble advice is don’t be a slave of some dumb process of SIP, keep reviewing the results. After this reality check, we may end up holding for very long term, that’s fine. Then you won’t be disappointed after 5, 10 or 20 years. You’ll have solid returns for having done that ground-work. On the flip side, if business and stock is not working out for whatever reasons, let there be no attachments – emotional or financial – just get out of it. We are only human, and make our share of mistakes. I never believed in holding forever theory anyway.
In either case, direct equity investing is for seasoned investors who have the core skills, temperament and staying power to reap rewards in the longer haul. If you are saying you don’t have the basic knowledge and traits required, I would say it’s better to engage a pro or somebody whom you can trust rather than burning your fingers, besides capital and time. Even with that, monitor the results regularly, can't leave investments in auto-mode.
Another sedate, less glamorous, advice on first day of this new year is to keep learning more and more so as to emerge better investors. Let’s all grow as investors, our investment growth will take care of itself.
With best wishes to all of you for a happy and prosperous 2014 and beyond!