Deep down, we all need a binary formula to rely on like buy & forget or momentum investing but from experience we learn that it doesn’t work that way all the time and these are just too narrow ideas for a system like the stock market.
Buy & forget candidates are slow/steady compounders that are rare & available at expensive valuations, which are always difficult to buy at current market price(that’s the trick markets play on us). Even if we get through this impedance, it is extremely difficult to stick to our own rules and hold on to it during the drawdowns(-40% or more price correction followed by narratives like growth slowdowns or other attractive opportunities available in the market, etc). This trait of handling drawdowns is what separates men from the boys. It is the constant research & unwavering confidence in our own time-tested rules, we get the conviction & patience to stay on course, otherwise for the question ‘is buy & forget a myth?’, from personal experience can say ‘it depends’.
constant research and stick to own rules , these two things seems contradictory. If you are constantly reseraching and upgrading your thinking, then your rules ought to update and change. You can’t stick to old rules which were based on your old and incomplete understanding. Kindly explain.
Since the context is buy & hold here, the research meant keeping pace with the developments of the business & ensuring that there are no considerable deviations from the initial growth assumptions & and if there are any, then selling partial or full needs to be considered.
Above is an example that can be part of the rulebook irrespective of stocks/sector under research and a mere price slump shouldn’t be the sole reason to reduce or exit from the stock, again this is from the buy & hold perspective, hope this clarifies.
I liked all these points.
This will reduce your list of stocks to about 2% of all the listed companies. This is just my guess. This will make your investing easy to some extent as you do not have to analyze large set of companies.
Predictability for 10 years is the most important point.
Management Quality should be of very high standards. If there is any doubt on this parameter, then you need to discard this business.
Sticking to rules is the most difficult part. Most of us start re-thinking as soon as stock corrects by more than 30% to 40%. This is the real challenge.
Most of us will agree that, if they would have hold some of the high quality companies for 10+ years, with regular analysis, probably they would have beaten most of the Mutual Funds handsomely, but this is the most difficult part.
I am just 20 years of age and started my investing journey when i was 18 and created a somewhat big portfolio for my age…I thoroughly enjoy the process of stock picking and am passionate about it…I pick cues and insights from reading ARs of Companies and from many valuation reports,screeners etc…I read many investing books of Peter Lynch,Buffet etc and understood that buying and holding for many years is the most successful and time tested strategy in equities…I personally think that if i pick 15 stocks and just 6 of them give me very good returns, 4 of them being duds and just breakeven and rest of them going down the drain…I would still beat the index and other Fixed Income instruments…Even if a stock which i pick loses its value completely…the maximum downside is 100% of my cost while the upside potential is unlimited (I definitely understand the opportunity cost of money,but the returns i would get in the 6/7 companies out of 15 would offset it is what i believe)…So I have decided to pick 15 companies and just hold on as long as possible while tracking the business on a yearly basis since quarterly tracking would make it complicated to hold.I am not being extremely optimistic and i have already lost good amount of money since i started at the peak of a bull market and as soon as i bought the stocks, the markets started correcting and gave me the bitter taste of losses and my portfolio is dead for the last 1.5 yrs due to the ongoing corrections in market…I have learnt many lessons in this short period regarding MoS,Valuations,Herd mentality,FOMO,Impatience,etc. and decided that Deep Valued research,Fundamental Analysis and conviction is what helps to stay the course during drawdowns. I Dont know if this would work or not…Reading the thread completely, I understand that many people who posted here are largely experienced investors and would love to get their views on my thoughts.Kindly Enlighten me if i am wrong in any front.
Similar story, I am just 21 years old. Started journey 2 years back, but I didn’t lose money (never invested lol, just studying for now). The most important thing I have learnt is 'what price you pay and for what?
And, I believe that intelligent selling is as important as intelligent buying.
One cannot hold forever due to the erosion of moat, and one cannot hold something at exorbitant valuations either. (Buffett acknowledges his mistake of not selling coca cola in 2007, when it was trading at close to 60 times earnings)
Microsoft was a brilliant company, if you bought/hold it at the peak of dot.com bubble, it would take you 15 years to touch those valuations again. Same story with Cicso and many more…
So yeah, economics, management and valuations are 3 legs of investing to me!! If one of them broke down, we are in mess! So yes, Intelligent selling is more important than intelligent buying.
‘Management quality, If there is any doubt then you need to discard the business’
I do not completely agree to this point, because the economics of business matters the most. Have a look at the businesses such as coca cola or Washington post, Burlington northern Santa Fe, ITC, Mou-tai, All liquors/tobacco/cigarettes businesses they can be run by a fool (which we term as great quality of business which needs no management competency), and in the past they did run by fools (great abilities to misallocate capital).
But in the end, their fantastic economics compensate for the management.
But, if the business needs a competent management despite having good economics like HDFC, Kotak, Amazon, Google etc. then yes, a deteriorating management is the call to get out of the stock.
While you may have learnt some, I would say don’t bother much about returns or PF as of now, and take every experience as learning for some more time. And as such, commit less capital, have some idea, some thesis, go as per your plan and see what happens. More often than not, you will be surprised, both ways, because there is so much to learn.
What you are thinking may have been better than what you thought at the beginning, but this thinking may change too with time. You may evolve into something else both as a person and as investor, one influencing the other. So give it time, let experiences happen, let them sink in, internalize them, and you will become better with time.
You may learn quickly and become a good investor sooner too, if you find a particular style appealing and naturally inclined towards it.
You can talk with @manhar who is of your age to learn about following a business.
I am a great fan of Buy and Forget and has worked very well for me in last 12-15 years. Have churned a bit but my performance would have been far better if I had not sold at all.
Some amazing data. Buy and Do nothing beats S&P despite not having FANG stocks.
In my opinion and experience its not a myth. If initial choices were made with some deliberation and keeping value in mind then not acting on the portfolio indeed can do wonders.
I started my direct investment journey in 2016 but started serious investing only in 2019. Initially I was tentative as to how I should invest… invest small amounts gradually, or invest lump-sum… invest in concentrated portfolio of stocks or maintain a fairly diversified portfolio. So, I invested in 14 stocks in Feb 2019 and invested equal lump-sum in each on the 1st day. However, market volatility scared me off and I liquidated entire portfolio and only again started building a diversified portfolio in a gradual manner a few months later.
I, however, kept monitoring that portfolio (in case I hadn’t redeemed it) and judged my active performance w.r.t that. And I have no shame in saying that my active performance has been significantly inferior.
So, in my analysis, the prerequisites of creating a Buy and Forget portfolio is the following:
Give UTMOST importance to the management. Choose managements that have a long track record of execution and good corporate governance.
Getting entry valuation right is very important. Better to start such a portfolio during bearish market.
Choose businesses that have long structural growth runway.
Choose market leaders which are much smaller in size compared to the market opportunity.
My own performance has been lagging mainly due to following reasons.
I bought more when narratives were peaking, i.e. during bull market.
I booked loss in positions where entry valuation was high and subsequently the industry went into severe headwinds (IT, Pharma).
My initial positions in the stocks were less during the bull run up. I built positions only when the run up started and I became more confident.
The final fact is that it is impossible to get all the bets doing well. Some will under-perform surely. But, the performance of your out-performers will take care of the rest.
P.S: I understand that the timeline to judge buy and forget portfolio is much longer. So, I will keep monitoring the portfolio.
I believe, almost all these points are important for Buy and Hold for long term candidates.
Management quality is the most important factor even in Secular industry like IT, so that cases like Satyam can be avoided.
In Banks, Yes Bank can be avoided only if you can doubt their Net NPA(s) which they were reporting consistently below 0.5, which eventually turned out to be incorrect.
Also, entering at Low valuations allows you to hold the stock for longer periods.
TCS was available at PE of below 18 during 2008 to 2012. That was an opportunity to buy and hold for a decade. There will be many more such examples.
Choosing business having long structural run way is also important, which could be Energy Exchanges, CDSL/NSDL, Asset Management companies, Banks with low NPA(s), Healthcare companies, Insurance companies, IT companies so on and so forth.
Choosing market leaders while opportunity size is huge - Could be difficult to find but with some efforts, we can find such stocks as well.
Also, most of these candidates will have Low Beta compared to Index, indicating that, Market respects these companies and hence those are much less volatile. Banks would be an exception as those will mostly have Beta close to Index Beta of 1. This is just based on my initial analysis of these Buy and Hold candidates mentioned in this thread so far.
Few days back I shared a paper experiment which I did in the past and claimed that buy and forget worked although the time span was mere 4 years. However, I suspect that some might think that it was a backtested model instead.
So, I am starting a new paper experiment with a 15 stock portfolio that I created on equal weightage basis with buy date of 28th April, 2023 (based on closing price). No further additions or withdrawals will be made to this portfolio. Adjustments will be made for demergers. I plan to update it’s performance on a yearly basis. The stocks were chosen based on the earlier stated criteria. Entry valuations in my perception are in fair to undervalued region.
Note that it is not a portfolio that I currently have.
Now this might seem like a childish idea but I still want to go about with this as I am a firm believer of buy and hold kind of investing, although I am fully aware that it is extremely difficult to practice in real life.
Hi @sujay85,
Sorry for an off topic question but need help to know which tool you are using to track your portfolio performance here. I am having trouble tracking mine.
The one being shown in the below image:
I did have a very amateurish portfolio in the initial years, which I started in Nov 2016 and liquidated in 2017, after I feared that my random selection of stocks will be perilous. That time I invested in stocks by screening them on the basis of ratios without context, and some through borrowed convictions from social media, especially valuepickr… Few days back I was thinking of making a small experiment as to determine how that portfolio would’ve performed, had I not liquidated it and rather kept it in a coffee can.
At the time of liquidation, it had 82 stocks with almost equal weightage, mostly in small-mid cap. The time of the experimentation also seemed perfect because the smallcaps seemed to have undergone a complete cycle from 2017 upcycle to 2018-19 downcycle, to current upcycle.
The result in fact shocked me… I found that the portfolio yielded a CAGR of about 16.1% since inception. In the past 5 years the CAGR was 17.5% which means it would have beaten BSE 500 TRI return of 14% handsomely!! In fact, the return should actually be a bit greater as Value research portfolio software didn’t include some demergers properly.
This happened despite that portfolio containing DHFL, Vakrangee, Sintex Plastics, Talwalkers, SREI, Zee Learn etc.!!!
I found that the portfolio outperformed because the accidental good selections outgrew the losers.
This portfolio even outperformed the other experimental concentrated portfolio in 3 year basis. I feel that is mainly because in that portfolio the top 5 outperformers became almost 70% of the portfolio and their recent sluggish performance had caused that portfolio to underperform. In this portfolio top 10 stocks contributed 35% of portfolio weightage, and so underperformance of any hasn’t affected the portfolio significantly.
This portfolio has beaten my current portfolio by a massive margin in last 3 years.
Conclusions:
Even a randomly selected portfolio can perform decently if kept untouched.
Portfolio size doesn’t matter much if the coffee can is kept for a very long time.
Buy and hold works best in small-mid cap space.
Borrowed conviction from a good companion like Valuepickr helps even a noob to outperform market in buy and hold mode.
Lastlly, following are the list of stocks with weightage. This is strictly not an investment recommendation and is shared on academic interest. I do not hold many of these stocks in my current portfolio.
Thanks for sharing! One question out of curiosity - do you think keep the allocation broadly similar across the stocks was another key factor?
(From what I see, for most stocks the allocation at cost was in the 11-13k range)
Proper allocation is in any day a better way to build an active portfolio. Equal weightage is a good starting point for a beginner who is yet to build conviction on any of the portfolio companies. In this case, “survival of the fittest” factor will automatically determine the portfolio allocation.
