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!