Wednesday, December 05, 2012

The 'buy and hold' policy!

It'll take me a while to get into the grove of writing travelogues - so till then, I'll ramble about a few other things.


I was talking to an elderly middle class man who takes care of carpentry work (he employs a few guys) was asking me what stock to buy; it's a little worrying when you recommend a financial investment to someone - especially if they don't have surplus money. What if your recommendation goes wrong? In that case, just because of you someone else loses their money! A frightening thought due to which I hardly give a stock reco; another reason is that without giving such tips, people can't judge whether you are a good stock picker - and when there is no data to look at, they assume that you are very good at it :-)

Buy and forget

So rather than flatly say 'no, I don't give recommendations', I moved our conversation away from that area. He told me about how he he buys stocks and then forgets about it. And then after a few years, he will take a look at his portfolio. And to his surprise he saw that a few companies have completely disappeared from the market! 

It made me wonder about the policy of 'buy and hold'. Does it really pay off? Well, maybe and maybe not - if you had bought an Infosys 15 years ago and forgotten about it, you will be sitting on a nice little fortune today. 
But for every such multi-bagger stock (stocks which increase your wealth) there are plenty of multi-beggar stocks (stocks that wipe out your wealth). I just went back through our stock market index (the Nifty which tracks some of the 50 biggest companies in India) - in 2007 December, the Nifty was at 5900. And now in 2012 December, the Nifty is again at around 5900! 

So that means that if you bought a mutual fund that tracked the Nifty or a combination of stocks that closely resemble the Nifty, then in a period of 5 years your wealth has increased by Rs.0! 

Yikes - alright, I know that a few of you will say "Hey, you can't just look at a 5-year period. Give it some more time." Well, maybe in another 5 years the Nifty goes to 12000 and in that case your returns aren't that bad. But if you take a look at some of the company stocks, you will find that the price of many have gone down by 80% or so - and it doesn't seem like they will ever regain their old highs.

And at this point, those of you who have never invested in the stock market will say, "Gee... this is exactly the reason that I stayed out of the market"!

Anyway, in the end I avoided giving any recommendations and told him to look at his holdings at least once a month to see how his portfolio is doing and take decisions based on that.

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