Well, I entered this exhilarating equity market a year back. At my nascent stage, the constant question which I always used to ask was “Should I book profit now?” or “Should I take an exit since I am having loss?” and similar other questions. But gradually I learnt the concept of “Buy and Hold”. This strategy has taught me not to fall prey to profit booking, learning about cyclical changes and much more. Let us develop an insight about the CRUCIAL INVESTMENT MANTRA.
What do you mean by “When It’s Right”?
“When it’s right” implies buying quality companies at a reasonable price. And by quality companies I mean a company with a unique and scalable business and competent management.
- Unique business: It means a business which can be differentiated, stands out from the rest and has an economic moat i.e. competitive advantage.
- Scalable business:It is a business which grows in either organic or inorganic manner without adversely affecting profitability and return ratios.
- Competent management: It means a management which has distinct and innovative business strategies with long-run growth outlook.
- Reasonable price:It represents buying a good business at fair valuations.
Buying right limits the downside by protecting your capital. It teaches you to be firm when business is going through downfalls due to cyclical changes.
The fulcrum on which successful buy-and-hold balances, rest on the most basic and bedrock of principles: Invest in what you know. One of the top rules of Warren Buffett for picking stocks is that you need to understand the business and the industry in which it functions.
Peter Lynch aptly described this in “Know what you own, and know why you own it.”
The main question is till what time we need to hold? 6 months or 1 year? 2 years or 5 years? But eventually I understood the correct meaning of what market meant by holding. Thus I came up with “When it’s right, it has to be forever”.
What do you mean by “Forever”?
“Forever” implies staying invested for a long time to realize the full growth potential of the stocks.
Being Disciplined on a good buy requires Focus & Patience. Short term is only for traders and momentum players. Money can be earned by trading but wealth can be created by holding a stock in the long run. If fundamentally a business is strong, in the long run it will perform well despite corrections in the short term. In the short term it is very difficult to predict the market, but in the long term we consider growth and corporate earnings which are intact. A good business needs to be given time to grow and hence investors need to be patient to realize the full potential.
The words of Billionaire investor, Warren Buffett: “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”
According to Warren Buffett the best holding period is forever. Don’t buy a company if you don’t plan on holding it for many decades to come.
Based on the discussion so far, two investment actions can derive us high payoffs:
- Buying right i.e. limiting the downside due to investment in quality stocks.
- Holding it forever i.e. maximizing the upside by having tremendous patience to tide the various market cycles over a very long term.
“100 to 1 in the Stock Market” authored by Thomas Phelps quoted, “To make money in stocks, you need to have vision to see them, courage to buy them and patience to hold them. Patience is the rarest of the three.”
But holding it forever requires reviewing the stock periodically. You need to check the following things:
- Are the reasons why you bought the stock still valid?
- Are management capital allocation strategies feasible?
- Does the company still have an economic moat?
- Is there any further growth opportunity for the company?
- Is company showing de-growth due to cyclical changes?
- Does company have reasonable valuations?
If the answer to your questions is “Yes” then by all means hold on to that stock. Otherwise, consider trimming down your holdings.
Buffett has stated that “Time is the friend of the wonderful company and the enemy of the mediocre.”
Thus concluding, Wealth Creation greets only PATIENT Investors.