Buy and hold investing in India – Big Vision Investing

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Remember the market cliché about some of the best track records coming from those of dead people’s inactive portfolios? This comes from a supposed study that was done by Fidelity, in which they noted an internal performance review on accounts to determine which type of investors received the best returns between 2003 and 2013. The customer account audit revealed that the best investors were either dead or had forgotten about their portfolios.

From Business Insider

This happens because emotions and opportunity costs are not a factor in dormant portfolios. Does that mean, one should not try to maximize returns from one’s portfolio by switching to better ideas? I don’t think that would be the perfect thing to do, considering the dormant portfolio data. I’ll tell you why. Imagine you were an investor in Wipro in Feb 2000 and somebody told you about inactive portfolios doing better than the active ones and based on that you’d decided not to sell. You’d have had 20 years of zero returns while the indices ran up multi-fold.

Very few companies survive the relentless onslaught of competition, technology, changing consumer preferences, changing government regulations and various other factors. See for example, the below list of top 50 companies by market capitalization in 1992.

Most of the above got replaced by better, sexier, smarter companies. And, most of the ones that did survive in today’s top 50, did so because of issuing new shares. Take State Bank of India for example. From a market cap of 22900 Crs in 1992 to 318,000 Crs today, SBI’s market cap grew at a pitiful 9.5% CAGR. I am not even getting into equity dilution which would chop shareholder returns down to much lower single digits.

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Or take ITC, a much debated hot stock. ITC’s market cap went from 9000 Crs to 2.6 Lac Crs, delivering a return of 12% CAGR, excluding dividends. That ITC would grow at a faster clip, 2021 onward, when it is 28x bigger, and is likely to be much more bureaucratic than it was in 1992, will possibly become a case study in hope based “long-term” investing, in the future.

Going back to 1992, as investors who believed in the India growth story, and who wanted to maximize their ROI, why would we have stayed invested in SBI/ITC when there were much better fish in the pond, provided one knew where to look? Shouldn’t we have been looking for faster growing high ROE companies, than the below large caps?

Company 1992 2021 CAGR (excluding dividends,dilution,spin-offs)
State Bank of India 22905 318787 10%
Tata Iron & Steel 13793 86385 7%
ITC 9128 259594 12%
Reliance Industries 6654 1310616 20%
HUL 6369 544606 17%
Tata Engineering & Locomotive  5287 N/A N/A
Associated Cement 4924 N/A N/A
Century Textiles 4003 5225 1%
Grasim Industries 3660 92495 12%
Tata Tea 3516 N/A N/A
Tata Chemicals 2986 18958 7%
Larsen & Toubro 2941 196339 16%
Gujarat State Fertilizers Company 2886 N/A N/A
Colgate Palmolive 2766 41860 10%
Master Shares (Unit Trust of India) 2699 N/A N/A
Cochin Refineries 2619 N/A N/A
Industrial Credit and Investment Corporation of India (ICICI) 2475 N/A N/A
Chemical and Plastics India 2133 N/A N/A
Hindalco 2104 73500 13%
Bajaj Auto 2069 104174 14%
Brooke Bond India 2060 N/A N/A
Indo Gulf Fertilizers and Chemicals Corp 1814 N/A N/A
Gujarat Narmada Valley Fertilizers & Chemicals 1779 4456 3%
Jaiprakash Industries 1779 N/A N/A
Shipping Credit Corporation of India 1762 N/A N/A
Bombay Dyeing 1686 1468 0%
Essar Gujarat 1683 N/A N/A
Great Eastern Shipping Company 1661 4513 4%
Tata Timkem 1530 9447 6%
Nestle India 1501 159778 17%
Castrol India 1479 12166 8%
Century Enka 1461 549 -3%
Indian Aluminium 1452 N/A N/A
Motor Industries 1445 N/A N/A
Britannia Industries 1379 84415 15%
Apollo Tyres 1328 14280 9%
Madura Coats 1308 N/A N/A
Gujarat Ambuja Cements 1160 58557 14%
Indian Rayon and Industries 1144 N/A N/A
National Organic Chemicals 1134 N/A N/A
Raymond Woollen Mills 1124 N/A N/A
Birla Jute Industries 1120 N/A N/A
Oswal Agro Mills 1112 132 -7%
Ingersoll-Rand (India) 1104 2116 2%
Mazda Industries 1095 N/A N/A
Siemens India 1038 64449 15%
Ashok Leyland 1028 33480 13%
VST Industries 1017 1017 0%
ITC Bhadrachalam Paper 1003 N/A N/A
SKF Bearings (India) 963 10757 9%
Data not available for companies marked N/A

Suppose an investor forgot about his large cap portfolio in 1992, 29 years later, in 2021, he would have realized what a poor idea it was, to leave his portfolio dormant. The top performer, Reliance Industries, delivered 20% CAGR, excluding dividends, while most of the remaining companies either ceased to exist or delivered single to lower double digit returns. I am not getting into what happened to companies where data is not available. And I am not inclined to calculate dividends either because we want to look at the most efficient way of calculating returns quickly. My hunch is that, at best dividends would add 2-3% to the above returns. It is not rocket science to understand that active investors who kept learning about companies did much better than the cumulative returns delivered by this dormant portfolio, including dividends.

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Conclusions

  • The answer to Buy and hold vs Buy and forget lies somewhere in between. Continue to hold companies that keep executing. For the ones that don’t, switch to better alternatives, because opportunity costs are real.
  • Buy and monitor beats Buy and hold any day. As Ian Cassel says “Fall in love with companies that execute but be prepared to divorce quickly.”
  • The above data is only for large caps. People typically invest in large caps for the certainty and clarity, the big companies provide. I agree with Ken Fisher, who once said “Clarity is almost always an illusion—a very expensive one.” As ROI focused investors we are better off investing in mid and small caps, even after adjusting for the risk involved in smaller companies.
  • Most things in the market are contextual. What works in the west doesn’t always work in India. Buy and hold may have worked in the case of Fidelity’s investors who forgot/were dead. It certainly has not worked in Indian large caps.

Barath Mukhi
30th-March-2021





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Barath Mukhi

Barath Mukhi

Barath can talk all day about fundamentals-based investing | He is passionate about learning and teaching equity investing | Small and midcap stock ideas.
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