This is the stock price chart of Asian Paints over the past 19 years (since May 2000). Point to point, the stock is up over 80x.
Our brain that works with perfection in hindsight would lead us to believe that buying and holding the stock during these 19 years would have been an easy choice for anyone who did it. After all, the only thing the investor would have done during these 19 years was, well, nothing.
I wish investing was that easy.
Of course, the idea of buying and holding high-quality businesses over a long period of time is simple. Everyone knows that, and even those who don’t practice it appreciate that this works with most high-quality businesses as history has proven time and again.
But then, it’s important to understand that the action of not doing anything over such a long period of time involves hundreds of decisions over months and years that lead to such inaction.
Of course, one way is to buy stocks and forget for 20 years and hope to end up with a fortune. There are quite a few such fairy tales you may have heard of. But the other side of the picture is that countless people have also ended with duds in their portfolios, or vanished companies, when they realized their father or grandfather had bought some stocks and forgot about them for 20 or more years.
Anyways, let’s get back to the example of Asian Paints. Here are the price charts of this 19-years journey of the stock, but broken down into charts that show how the stock price behaved within blocks of three years starting 2000 (2000-2003, 2003-2006, etc.)
Consider the countless, mostly invisible and forgotten, decisions the rare investor, who held on to the stock for these 19 years, would have had to take to get to an 80-bagger.
Like, this investor saw the stock go through extreme volatility during 2000-2003, but did not sell…
He then saw a long period of the stock not doing anything and then running up rapidly, during the 2003-2006 period, but did not sell…
He may have then faced the continued temptation of selling the stock to shift to hotter stocks from the power and infra sectors during the 2006-2008 period, and then saw the stock melt down with the overall market in the 2008 crisis, but did not sell…
He then saw a great three years period between 2009-2012 when the stock went up almost 5x, and may have thought that it had become overpriced, but still did not sell…
He may have then gotten worried about the stock’s rising valuation amidst a business slowdown and poor predictions from analysts and other experts during the 2012-2015 period, but still did not sell…
His worries would have been aggravated by newer issues in the 2012-2018 period, like rupee’s depreciation and rising crude oil prices and thus rising material costs that may have hurt the business’s profitability, but he still did not sell…
And of course, during these 19 years, apart from a lot of such big decisions, there would have been hundreds of small decisions that the investor would have had to make to stay put in the stock, and not sell.
He, for instance, would have fought the –
- Stock ticker tape that made its presence felt every minute, day, week, month…and sometimes indicating that the price was down more than 10% or 20% in the month gone by,
- Fear of losing more after a crash in the stock’s price and to cash in on whatever profits that remained,
- Brickbats from fellow investors who were raking in quicker gains from hot stocks,
- Temptations to “book profits” after sharp run-ups in the stock’s price,
- Thoughts of selling and reinvesting in other stocks that were rising faster (like power and infra in 2006 and 2007),
- Thoughts of selling because experts said the stock had become “overpriced”,
- Advice on selling from the financial advisor to rebalance his portfolio,
- Thoughts of selling after making the first 2x, or 5x, or 10x,
- News flows that suggested the next few quarters were bad for the business, etc.
In short, for the rare investor who held on to Asian Paints (or similar such businesses) for these 19-20 years to see huge wealth creation, it was not a simple buy-and-forget decision.
In fact, the act of ‘not acting’ on a longer timeframe was made up of hundreds of small decisions that led to the ultimate decision to ‘not act.’
This is one great lesson for an investor who believes in the power of long-term investing but also believes that it’s often an easy decision to buy and hold high-quality businesses.
Businesses change from time to time, and so do emotions, and so does the behaviours of other investors around us, and so do conditions in the stock market and of our portfolios. And that’s why sitting on stocks – the ones that remain high quality – is not as simple as it sounds. And that’s why patience is one of the most important yet difficult skills one must cultivate while investing in the stock market.
George Baker made a powerful remark which Thomas Phelps quoted in his book 100 to 1 in the Stock Market –
To make money in stocks you must have “the vision to see them, the courage to buy them and the patience to hold them.”
Patience is the rarest of the three, and is not an easy skill to develop however easy experienced investors or advisors may make it sound. But if developed and practiced well, it pays off well in the long run.
That’s how fortunes are made in the stock market. Just be prepared for the grind.
And stick with quality until it remains quality. Because if it is not quality, buy-and-hold won’t help you create wealth, but destroy it…
And this one is both simple and easy!
Thank you Vishal for your valuable advice.it is really beneficial to all the long term investors.
R/s Sir , before year , I am unable to understand , though I take help of dictionary… , some phreses in foren contries.
Now your writeup is becoming simple. Easy to understand .
Thanking you.
Simply yet one of the most important aspect of value investing, fabulously explained with doodle on charts. I simply love your doodle… Great work Sir.
Nice article. I have the patience but yet to develop the skills to identify a good business. Lost money in Manpasand, Motherson Sumi, Bal Krishna Tyres, Yes Bank, Syndicate Bank holding since almost 7 years now. Only Infosys is the good one in my list as of now. Anything you suggest to improve the skill of identifying the business. I am already 40 years now.
Motherson sumi is up 6x (500%) in 7 years… That’s an annual compounding rate of 29% per annum… What else you want from life? 🙂
If you have a job….I would recommend putting money every month in 10-12 different good quality stocks like Asian paints and HDFC bank and keep doing that as long as possible… Don’t shuffle the portfolio…. Let the winners in the portfolio compound and also let the losers stay there…losers won’t impact the portfolio in the long run…as gains from winners would be outsized… Also use opportunities where a sector is battered badly…pick the ones which you understand and can be reasonably sure to do well over coming years….for example…the housing finance NBFCs are battered…but DHFL has real issues while IBULHSG may be able to overcome the temporary issues…so do your independent research n take a call to allocate some funds there. Disclaimer: I recently bought IBULHSG so consider that I am biased. I am just giving an example, not a recommendation to buy/sell any stock.
Nice to see the data and contents. No doubt Asian Paints proved a multibagger but financial performance has not kept pace.
During last 16 years net profit of Asian Paints has multiplied 15 times compared to stock multiplication by 74 times. Clearly the stock is highly over priced.
Ruling PE is 70 compared to last 5 years net profit cagr of meagre 12.61%
It is a very good article. Very informative, interesting 😊. Thanks.
Hi Vishal
I have just join mastermind. By profession I am an urologist.
This is a great lesson every investor must learn and that is his/her own behaviour. Opportunity will comes but courage to buy and hold for 15-20 yrs is important.
Thanks
Gautam
It was nice reading your blog. Marvelous work!. A blog is brilliantly written and provides all necessary information I really like this site.
Hi Vishal.. I just love the way how you put it in such a simple and understandable language.
One question though.. How do you identify ‘quality is quality’? Are there any set parameters or guidelines for it? Would appreciate if you can write a bit about it and explain it in the most beautiful manner as you always do.
I owe you a big thanks Vishal for providing insightful information for the investors. We are really going to be benefit a lot from your information
Very good article, holding companies running by good management with patience is more important.
Hi Vishal
Maximum content with minimum simple words & simple charts.
Highlighting the emotions involved during the investment journey, was a great job.
Thanks
Kanwaljit
Hi Vishal,
It’s always great to read your letters and good to hear that the investors can take such a long holiday.
You focus a lot on quality businesses and buy and hold them for a long, long time. But to know the quality of business we must know about the working of the company and industry it is in.
What are the ways you would suggest to get a deep understanding of the industry and the company?
Of course, one of the many ways is reading books but the problem I face is in selecting the books to read. Please help me out here.
Thank you
Sarbhav
Hey Vishal. Really nice article with very good explanation using Asian paints charts. Even those who have learned it need periodic reminders on this. May be you can add in this article or in another one that diversification can make it easier in the decision of holding, as then over time, winners will take care of the portfolio while losers won’t impact the portfolio much. You are doing great work. Thanks for your hard work.
Great article sir,
We can create huge wealth only in long run. Else trading and short term are just foolish things. I am happy to be an investor.
Thanks.
Thanks a lot vishal for such a terrific explanation of quality in stocks….yes its very tough to remain patient in bear phase but one who does this comes out as a winner….Thank you very much for your hard work and sharing great information with investor community.
Thanks. There are many such stocks like Axis bank hdfc bank shree cement maruti Britannia which had it’s best and worst period. Just continue to hold good stocks
Your every email so informative, always adds value to my knowledge and gives me persistence power towards happiness.
Thanks SN, very good article and appears to be ‘learning from first principles’. I am not very active in stock investing, but for a brief while I had seen different avenues very closely and burn my fingers, hands… Anyway, staying positive and learning from your knowledge and experience is my new mantra. I think time is the best healer, but number game is something one should avoid getting overboard with. Little bit of statistical analysis is fine off and on, or at a pre-defined frequency, but constantly looking at the same stock or the market index and talking about the causes and events and what not is doing more damage to masses and than any concrete good. As long-term investor one should spend max time identifying the good lambi race ka ghodas and fundamentally good people (scrips) and stick to it, right?
Hi Vishal. I have been reading your articles since 2012. I even attended one of your mastermind course in Delhi in 2014. I always used to think that sone day I would be able to figure out how to analyse the business and find a good company that one can buy and hold forever. But all these years I have not been able to reach that stage. Isn’t too tiring and tricky and definitely not my cup of tea. However I did not stop reading your articles and other good sources of knowledge like Benjamin Graham, Nassim Taleb, Daniel Kahneman, Benoit Mandelbrot, Peter Lynch, Charlie Munger etc.
In Nov 2018, I came across a vidoe on YouTube which introduced me to Mutual Funds. I must mention that I have already rejected the idea of mutual funds few years ago as being inferior to individual stock selection. But then the vidoe showed me a calculation which mentioned that if I had simply invested an amount of money as an SIP and hold it for a longer period of time I would have been well off, rather than trying to find out a multi bagger by mugging my head into piles of annual reports and spending sleepless nights doing forward and backward calculations. One more video goes a step further and tells that if someone would have bought an Index Fund 40 years ago his money would have grown up by staggering 300 times!! No brains applied. Just buy and hold. For the benefit of other readers I would suggest you guys may consider gaining more knowledge about index funds. Even Warren Buffett has recommended buying them. For the begining I would suggest to watch YouTube videos if JL Collins and Varun Malhotra. You can take your research further also.
Thanks Vishal for providing gainful insight through such articles. They are such a morale booster.
Regards,
Very nice article. It always bring knowledge and a thinking process towards investment. As you mentioned, Investment is easy when
it’s on paper but in real life it needs dedications, courage and patience. Keep writing such great articles to boost our knowledge in the world of investment.
Hi Vishal,
it’s always bring knowledge and impressive thought towards investing by reading your articals. Your explanation was very good by the help of charts and which shows your dedication and hard work.
Thanks, Vishal. This article is a good reminder to stay simple and stay focused. Very well written.
Patience is definitely the most important tool a value investor should possess. IMO, staying with good management in ups and downs will always reward the investor. Good management is transparent and clear in his thought process. Identifying good stocks through screener doesn’t make sense, need to invest only in solid companies with very high quality management.
Thanks Vishal, Happy to see you back !
The reality is described in this quote
‘But the other side of the picture is that countless people have also ended with duds in their portfolios, or vanished companies, when they realized their ”
I am one of such person who felt this after purchasing shares since 1984. numerous examples are; Modi cement, Mazda leasing, Binani zink, JM financials…. out of 20 only 1 or 2 script proove quality one.
So the main question is how to identify quality before it vanishes? easy to say after 19 years but when prices fall 50% it is difficult to decide quality.
I had purchased Colgate and Hindustan Unilever Ltd. at Rs. 1150/- about 2 years back both are good quality companies Colgate is traded at the same price and HUL has gone upto Rs.1800/- please advise if i should continue holding Colgate
Valuable write up. Thanks for an effort.
Tempted to study more from you . I am new in this field.
without a doubt but one of the maximum important issue of value investing, fabulously explained with doodle on charts. I really love your doodle…
The article is like an incredibly soothing balm in these turbulent times for investors who think long term…