Is Buy and Forget a Myth?

Investing Strategies
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As a learner we read books, and listen to the experts with rapt attention. One of the theories that we swear to follow, but seldom do is the credo that one should select a company and forget it.
Often we are given the example of an Asian Paints. One is supposed to have just bought it in 2013 at ₹440 and lived happily ever-after. Today’s price of ₹3115 makes you wonder why one’s parents did not buy it! But then they did not buy Pidilite either ₹211 in December '12 to ₹2610 today.
But then there was an article by Devina Mehta, where she puts forward a different argument.

If we do our research, we can give a thought to what was hot in 2012, and what has happened to them.
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Wockhardt was more a thousand in Dec 2012. In March '13, it crossed ₹1700. Today it is ₹224!
JK Lakshmi Cement of course has gone from ₹160 to ₹795 in about10 years.
Den Networks has gone from ₹198 to ₹35 in about the same time.
United Spirts was ₹198 about 10 years ago, and is ₹878 now.
Vakrangee was ₹32 in Jan '13, and is now ₹27.
So, from an examination of the 5 winners of 2012, we get mixed results.

So, what it ultimately amounts to is, it is your choice in the companies you invest in, and though everybody (including me) pretends not believe in it, the luck factor too.
Lesson to me is that every company is not an Infosys or a Divis. Today’s winner may make its name as a leading dud some years hence.

Of course, if there is nothing the wrong with the company, but only the market has tanked or the sector is out of favour temporarily, and one needs to emphasise temporarily, because Kodak was the leading film maker without which we could not imagine our camera at one time, one adds to one’s portfolio.

Really, the wise ones would have got out of the companies which fell on bad ways. And that puts paid to the theory of sticking to your choice. Patience is a virtue, but even the bravest general sometimes choses discretion over valour and lives to win the bigger war.

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Buy and hold has worked for a lot of investors and will continue to do so going ahead also. But the key will always remain selection of the company suitable for this strategy. And periodic review about the strength of the moat of these kind of companies.

The big problem faced by a lot of investors is that they mistake the high quality companies of sector in current fancy as a buy and hold candidate. Recent examples in my mind are companies like GMM Pfaudler, Deepak nitrite, Laurus, etc. If you look at these companies, then there were very clear sector specific tailwinds associated with these kind of names and these tailwinds were expected to wane after a point of time to be replaced by headwinds. I have seen people wax eloquent about the merits of these companies and managements etc. And once the tide has turned, instead of blaming themselves, investors start blaming management, or anyone else convenient.

Compare the above companies to the likes of Nestle, Hind Unilever, Pidilite, Asian Paints, Colgate, Dabur, Marico, etc. The latter companies are suitable for buy and hold kind of strategy. There too say in case of Asian Paints, I can see some threat emerging in the form of entry of two deep pocketed business groups like Jsw and Grasim. How the threat plays out needs to be seen, but it is an angle definitely to be kept in mind.

The above list of stocks will probably give returns better than fixed deposits without being too exciting. For really exciting returns, one has to try to find out the next bunch of companies which can be buy and hold kind of companies. The first and only company that comes to my mind as of now is Zomato. I think its a duopoly market, with a lot of players having exited, and with a growing market. As of now its burning cash and we need to monitor when and how its cash burn phase gets over and it starts generating free cash flows. And a lot of froth is completely out of the stock with the kind of drubbing it has received. I have it in my watchlist but haven’t bought it.

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Buy and hold strategy also suffers from market maturity. When Buffet started value investing, lots of factors were not baked into the pricing of companies at that time. FCF and Dividends were the supreme indicators. Lasting competitive edge, brand recognition, redeploying cash flow into business investment strategies, commodity vs value added products, and optionalities open to the companies; they were not priced into the market at all. As investors matured and new models of Fair value calculations came out, companies began getting closer to their true value much faster.

Today, rising stars and sectoral expansions are identified much faster. Information accessibility adds a faster discovery of price and prospects. Technical indicators squeeze out trading noise and bubbles of accumulations, social network propagates new datapoints and hidden gems much faster, options and HFT eke out the last juices of mispricing.

Today, investing edge has become one of reading the euphoria or negativity surrounding a stock/sector and finding pockets where pendulum is swinging too much. That arbitrage is your alpha. Pick up trends faster than market by curating right signals and discarding the noise. Buying too late or holding too long gets punished.

Atleast that’s where my head is at. I’m sure market will teach me all the ways I’m wrong.

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Hello Hitesh sir, most of the companies which you have mentioned like Marico, Nestle, HUL, Colgate etc all of them belong to FMCG areas. So as I understand you wanted to say that most of the buy and hold stocks mostly come from FMCG sectors (not often but yes) where the particular products launched by the any FMCG company come out as a game changer for them and creates a huge value in long run. Am I right?

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Hi…Your example of deepak nitrate does not fit into non-consistent compounder. It might have benfitted from recent chemical stocks rally and china+1 rally…but long before that and from few decades , its doing consistentdoing well. If you see its long term price chart , its evident that it doesnot fall into cyclical stock. Its growth has been Consistent and secular. Kindly let me know where I am going wrong.

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@Noobinvestor

The main characteristic of buy and hold companies is consistency in earnings… And this consistency in earnings has to be seen on an annual basis. Since the FMCG companies have products that demand regular usage and do not pinch the buyer’s pockets too much, they have some element of pricing power. These type of companies too will be hit off and on due to raw material costs and demand elasticity, but overall the picture remains that of consistency.

There will be other companies that fall into these slots, but the first companies that come to mind for buy and hold kind of portfolio are these.

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Buy and Forget

It is not a myth but it might not be suitable for everyone.

There are few factors that need to be looked into for this strategyto be successful.

a) Kind of companies that you select ( Hitesh sir has given a great insight for the same)

b) Your age - if you happen to be young and have some disposable income,you have years on your side and you can go through the market-volatilities more easily as compared to a person who is above 50 and has started building the retirement-nest .

c) Your allocation % to equities out of your total netwroth - if your equity allocation is in the range of 5%-30% of your total networth , the market’s ups and downs may not disturb you much and you can let the market compund your money without disturbance. Higher the allocation % , bigger the worries and more propensity to enter/exit and thus leading to the failure of this strategy.

d) Your aptitude and conviction : We all have have different behavioural patterns . Some people can sit through draw-downs whereas others loose sleep even in a one week -long correction. So but and hold may be suitable for one person while other may run away.
And aptitude , many a times,is also determined by your conviction .Your knowledge of your selected companies, your knowledge of the markets . Better the conviction, better the results of B & H strategy.

e) Market -cycles :This is another important factor. When you enter the markets ?
If you enter the market at the start of a bull cycle and your experience is positive , you might stick to B & H even in a bear-phase. But if someone enters during a bear-phase , he would always be doubtful of the markets and he may ditch B & H in between .

In short, money-making is not that simple.We should choose what suits us depending upon our age, risk-aptitude , conviction/knowledge levels. And apart from that understanding market-cycles is also important to decide your allocation % ge.

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@Mudit.Kushalvardhan

Deepak Nitrite as a buy and hold candidate would have been okay if it would have been held since around 2015-16 till Oct 2021, a period of 5 years. Stock price went up from levels of 50-60 to 3000. This is the period during which early signs of sectoral tailwinds in chemicals sector began and gradually became stronger over period of time, and now it seems the sector is facing headwinds in terms of supply glut and demand problems. One good thing about Deepak Nitrite was that the massive capex came on stream at a very opportune time and that helped company post big profits on a small base, which resulted in multibagger returns.

But trying to extrapolate similar kind of returns from here to next 10 years is a tricky proposition. Its difficult to extrapolate returns of a mere 5-7 years and project earnings trajectory for next maybe 5-10 years. If you look at the business segments of Deepak nitrite, basic chemicals and phenol are pure commodity business prone to vagaries of demand and raw material price volatility. Company does not have much pricing power. Fine and speciality chemicals is a good segment of business. Company does mention about getting into fluorine chemistry products, but my gut feel is that they might have missed the bus, with companies like guj fluoro, navin fluorine etc making hay while the sun is shining for the sector.

The problem here is of recency bias. We tend to remember and pick out companies that have created huge wealth in recent past. A lot of investors had similar affinity to Laurus Labs, but forgot that it was a company that enjoyed strong tailwinds in the form of API demand, some pockets of shortages, some company specific tailwinds etc and it all came together to create a big winner.

Immediately post its IPO, in some investor whatsapp groups I frequent, Laxmi Organics was touted to be a buy and hold for ever kind of company. It was more because of the kind of price fancy prevalent at that time than a genuine attempt at understanding the business model.

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Hitesh Bhai,

Curious to know which have been your long term bets, and how long you have held them or holding now, with no such intention to sell atleast in near future?

Basically, trying to understand your buy and hold/forget picks

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@ram1984

I am more of a momentum investor, so I am not too keen on buy and hold for long term kind of strategies. Doesn’t suit my temperament. As of now, longer term bets I have been holding for more than probably 1-2 years are Guj Fluoro, HBL and Usha Martin.

For me, any day I find a better alternative bet, I have no inhibitions on selling something I have held for long. I am a very hard taskmaster for my money. :blush: It has to work hard and fast for me. :grinning:

And I have my fair share of successes and failures, so don’t go by my style. Having a theory is okay, but I think at some point of time if it is needed, its important to be flexible to modify it or alter it.

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Absolutely I agree. Its alright to hold a share for long term, but when the market is moving on and you stock is suffering from African Trypanosomiasis, also known as “sleeping sickness”, it will be an emotional bondage to stick to it.

Moreover, a middle-class investor has only that much money. When he sees that the PSU Banks or the Defence Stocks or the Capital Goods are marching ahead, or you realise that some sector has totally legged behind (Pharma/IT) and is crying for investment, it will be difficult to control the temptation and not sell a stagnating stock and move on. And why not?

Perhaps long term means holding a stock, and not jumping in and out of it, but some people may find the idea of being ‘wedded’ to it less than appealing.

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I sometimes feel there is no right answer for buy and forget. I know middle class investors who are today in their 60-70s and who invested in every IPO, every stock during their 30s. They never sold any. They have companies from asian paints, colgate, Abbott (during the time it was known/merged with Burroghs & welcome), to delisted companies to companies that got merged into another, then another into some other :grinning:

The ones which have had a run up in the last 30-40 years made up several X and took care of those where they lost 100%. Now what would have happened if they had jumped in and out trying to take business calls based on available news? they may have done well or may have ended up selling gems. There is no right answer here.

Btw the portfolio of these gentleman whom I know run into 4-5 cr easily, which is big given their income.

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Buy & Hold is a thing of the past because the longevity of moats keeps getting shorter.

Here’s some data to chew. The average tenure that companies spend in the S&P 500 keeps getting shorter & shorter. This means more and more companies’ moats are getting disrupted faster than before.
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Here’s one more list. In a matured market like the US, we can see the churn. For example, General Electric stayed in the list from 1960 to 2010 and then it was gone, just like that! Whether or not any other company can beat GE’s record of consistently staying on the list for 6 decades remains to be seen. None of the co’s that made it to the list in the 80s & 90s are have survived in the list.

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At overall index level, there have been phases wherein entire markets as a whole did not budge for decades. We can only imagine how difficult it must have been to buy & hold through those decades.

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How rumors spread and the importance of verifying the source
On similar lines, I’ve heard some very smart people cite a Fidelity study which claimed “Some of the best returns come from portfolios belonging to dead people.”

And then the source (Jim O’Shaughnessy) comes on Twitter and says this.

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For equity investors, all of the above mean adapting to the new reality which is basically that buy & hold worked well once upon a time and no longer works for most companies (the keyword being “most”), because most business models keep getting disrupted, thanks to relentless competition and a host of other things.

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If you buy a Colgate, an Infosys or an AP at 100 Cr Market Cap, you have to hold them forever.

All these buy and forget success stories belong to very small companies of yesterday. Infosys, Colgate, HUL etc. You buy and hold small caps over a long period of time to let them realise their potential for you.

Even today if you buy small caps, assuming they will be a success story, you have to hold them forever.

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27th Wealth Creation Study.pdf (1.1 MB)
The theory of Ramdeo Agrawal is that the stocks may be divided in two categories, the consistent and volatile.

I have not yet read the study, but we also know that there are stocks which are clearly cyclical. Peter Lynch for example mentions the Auto sector as cyclical. In our case, sugar and metals we have seen going through cycles.
Then there may be stocks which are rising because of certain news, for example, sugar because of ethanol, paint companies because of decline in the petrol prices.
It would seem that once the news has been factored in, the stock would lose its momentum.
That is not to say that among these two there may not be consistent compounders which have come through many cycles, like Asian Paints.
India, I am afraid, is also going through one such cycle where everybody and his uncle would be invested in in infra and capital goods stocks. And then there will be people who would enter these stocks, having heard of it late, mostly seeing on channels that the stock is rising 5%/10% everyday, and will get singed.
So, may be this may be one idea. There are stocks which one would buy and forget, and then there will be some which come like a season fruit.

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I believe that, Buy & Hold can create very good wealth if an investor understand the longevity of the business, its moat - whether it is expanding or shrinking, consistency in its earnings, ability to understand whether the competition will eat into its business or not.

Imagine, that, an Investor decided to stay invested in IT company after seeing success of Infosys, and due to wrong management decision, stock corrects in a year by 50%, then how many investors will be comfortable with the idea of holding it for very long period, say 20 years. It depends on the temperament of the investor. There have been many failed IT companies with same business model like Infosys. In the hindsight, Infosys looks like a great investment, but think of failed IT companies as well.

How many investors would have predicted that, Cyclic business like HDFC Bank would give massive returns if you bought it at IPO and hold for 30 years? Banking is a high risk business. For every successful HDFC Bank, there are many failed banks. So it is not that easy to select the Buy and Hold candidates.

Even HUL has gone through tough situation and the stock price has not moved for a decade or so. It is difficult to hold onto the stock for 20 years if it does not give any returns for 10 years out of those 20 years.

What might work for many middle class investors is to Buy stocks which look undervalued using some common parameters and sell when those get extremely overvalued, and use the profits booked for your Financial Goals. This way, you reduce the risk of remaining invested in overvalued business, and also achieve your Financial goals.

I may be wrong in my analysis, as I believe in buying when stocks are undervalued and selling when those stocks get overvalued, as per my own analysis. I follow this approach, as I use the profit booked to achieve financial goals or at least move ahead towards achieving the financial goals.
My direct equity portfolio is distributed across few Financial Goals. So when profit is booked in some stock, then I see, if I can allocate some part of it to the specific Financial Goal by investing that amount in FD/Debt Fund for that goal; and remaining part of the profit is reinvested in next undervalued stock as & when an opportunity is presented.
This process has given me reasonably good results, as few Financial goals have been achieved ahead of time or on time.

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Most new era investors, just like old, are in lookout for better returns…constant endeavour of better than nifty, any particular index, mutual funds etc.

Even mutual fund investors are in constant endeavour of better performing funds etc.

In this ambition, the typical buy & hold candidates are overlooked because most of the times they would provide average or only slightly above average returns.

Best bet for those practicing buy and hold is to follow - buy, hold & buy more in situations of panic. Incremental capital may generate above average returns then, provided the company is right.

For those who believe it’s a myth or a thing of past should refrain from this strategy as most likely they would pick up wrong companies.

All old investors whom I know and who have done well is on their buy and hold strategy only. Even 1 or 2 of their picks which were right businesses did beautifully over time. Rest junk businesses were picked in endeavour of quick money. At those times selling was not at click of button so they ended up with papers of such busted companies.

For buy and hold, you need to pick up simple & lean businesses irrespective of market cap. GE is a conglomerate and although I have not studied it, became too complex with time. On the other hand, pick up chart of Johnson & Johnson or P&G which appeared in above list for 2 or 3 decades or even Hershey’s, which is not even in the list, and see their 50 or 100 years chart…you would get your answer…

Disc. Views personal & for academic purposes. I can be completely wrong in all my assessments

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Thats absolutely right. But we do the opposite. Many an Investor would currently be committing, what I would call classic mistakes. Many investors have got out of IT and and entered infrastructure and cap goods shares.

Long term is basically contra play, where one buys beaten down stocks and goes against the trend. FOMO of Defence/PSU stocks and PSU Banks stocks in particular has caused investors a lot of chagrin, and made them change their plans of buying IT now that it is beaten down.

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I am not too sure about the Nestle, HUL, Colgate, Dabur, and Marico category either.

  1. There is no valuation comfort. At P/E of 50+, P/Sales of 10!!
  2. Many competitors entering the business. Reliance is one of the biggest threats to the growth story. They own the distribution and they are building their own brands!! Then the likes of Bigbasket, Grofers, Instamart, etc… are launching their own private brands (especially in the food category). Amazon and Flipkart private brands will also compete.
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Read this article in Finshots today which is fairly closely related to the topic in this thread.

Because it discusses action bias. Our tendency to take action even when it’s better to sit quietly and do nothing.

It cites a wonderful research study to illustrate the concept. Whereas it states that in penalty shootouts while on an average 39% of all shots goes straight down the middle, only 6% is actually saved.

Reason? You guessed it already.

It is worth mentioning that I am not an advocate of the buy-and-forget strategy. But neither am I an advocate of frequent churning.

Thanks - Arnab Roy

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