'I Want to Invest in the Next Infosys and Forget it for 20 Years...'

In this issue:

» Don't be swayed by the survivorship bias...

» Oil prices: What will be the new 'normal'?

» Will consolidation be the panacea to public sector banks' woes?

» ....and more!

A close friend of mine had his first baby about three months ago.

When I met him, I asked...

• Tell me how it feels to become a father...to hold your tiny, little baby for the first time?

The spark in his eyes said it all.

When I met him again recently, he talked a lot about how his life had completely transformed after becoming a father...

• It's been just a few months that I am in this new role...but my life has turned 180 degrees. There is so much that goes into bringing up a child.

• It's a big, big responsibility! We should be very grateful to our parents for all the love and care we received.

Then our discussion moved to money, business, and stock markets.

His business has been doing fine. But like any responsible, caring father he wanted to secure his daughter's future...

• I want to invest in stocks for my daughter's future. But I don't want to repeat the mistakes my father committed.

• My father has been in the stock markets since the early 90s. He has seen the greatest and the longest bull-run in the Indian stock markets.

• On several occasions, he held stocks like Infosys...HDFC Bank...Larsen & Toubro...Sun Pharma...stocks that skyrocketed over the last couple of decades.

• But unfortunately, he sold off those stocks too prematurely...for profits that in retrospect appear quite petty. Had he just bought them and forgotten about them for 20 years, he would have amassed a big fortune.

• I have resolved not to make that same mistake ever.

• I have set aside some money to invest for my daughter's future. And this is what I want to do: I want to invest that money in a handful of stocks that could be the next Infosys...and I just want to forget about them for the next 20 years!

• So Ankit, what do you think? Don't you agree? You have always been a proponent of long-term investing, right? And doesn't even Buffett say his favourite holding period is forever?

This was my response to him...

• Well, I am truly glad that you are thinking and preparing for your daughter's future...and I really appreciate your vision to patiently invest for the long-term.

• But...

• I'm afraid your plan is flawed...

• Let me explain.

• You are saying that you want to invest in stocks that will be massive wealth creators 20 years from today. But this is practically impossible to predict.

• You are looking at the success story of Infosys in retrospect, and hoping that you can replicate a similar success by simply holding some stocks for 20 years.

• That's survivorship bias. You are concentrating only on the winners of the past. But do realise that for every single immensely successful Infosys there are hundreds of dud IT stocks that failed and destroyed investors' money.

• Of course, it is true that real wealth compounding happens over the long term. And your aim should be to pick stocks that have good business fundamentals and healthy growth prospects for the next five to ten years.

• But the economic landscape is dynamic and changing. You have to periodically monitor the company's performance and management actions...and to see if your investment hypothesis is still valid.

• Even Buffett does that!

• You can't simply have a 'buy and forget' investing strategy, hoping that it would make you super rich after 20 years. You don't get rewarded just for holding something for 20 years. You need to have a process that allows you to keep riding winners and eliminating losers.'

When our Hidden Treasure team discovered its biggest money-multiplier in Varthur Hobli, we didn't expect the stock price to go up over 34 times in a span of just 7-odd years!

And guess what, we haven't closed the position even after such a massive run up. This is because we believe it has many more years of solid growth ahead of it.

In fact, my colleague, Radhika Pandit, who manages the Buffett-style ValuePro portfolio, is always on the lookout for great companies that have a solid business model...wide economic moat... and long-term growth visibility.

Her aim is to build a portfolio of stocks that could deliver a total return of four to six times the original investment over a five to ten-year period. But this doesn't mean that she won't ask you to sell a stock if the business deteriorates or valuations become irrationally expensive.

By the way, here is some good news...

She has just found a solid company that meets her stringent 'Buffett-would-buy' criteria.

Unfortunately, I can't reveal much about the company right now. But I can tell you that this company went through a big transition five years ago. There was a lot of uncertainty back then. But now, the company appears to be on a solid footing driven by its strong in-house R&D efforts.

But you don't have to wait long. Radhika is going to reveal this rare investment opportunity TODAY. And we certainly don't want you to miss it!

Click here to know how you could get access to it.

Do you think a 'buy and forget for 20 years' investing strategy really works? Let us know your comments or share your views in the Equitymaster Club.

2:50 Chart of the day

Until a few years ago, US$ 100 per barrel was the new 'normal' for oil price. And then this capricious commodity proved every one wrong. Oil has seen levels below US$ 30 per barrel this year.

Now before you jump on to deciding the next 'normal', here is some thing to consider. Over the long term, and on the basics of demand and supply, oil should be priced well above US$ 30 per barrel. This is because oil prices should be decided by the marginal barrel. And that, as per Khalid al-Falih, the new Chairman of the Saudi state oil company Aramco and one of Saudi Arabia's most influential energy figures, is way higher than US$ 30 per barrel.

On the supply front, the key oil producing economies have been the worst hit by the price crash. Further, spending on energy and oil projects has also taken a hit. As per industry reports, oil prices below US$55 per barrel is a real pain for shale producers. This is important since OPEC has resolved to keep oil prices low to undermine shale producers and maintain supremacy. As US shale production cools, there's good chance oil prices will rebound.

However, once again, sentiments have overshadowed rationality. Markets have over reacted. And this is well reflected in price of some of the stocks that deal in the commodity. As the markets turn fearful, long- term investors would do well to not ignore these stocks (Subscription required).

Of the myriad issues Indian economy is facing, one that deserves special mention is the banking sector crisis. Banking sector is supposed to be the pillar of the economy. And no economy that lets its foundation to go weak can expect to prosper.

Over the decades, lack of autonomy, irresponsible lending practices and inefficiencies have led to bad debt crisis in public sector banks (PSBs). As suggested in an article in Firstpost, PSBs hold more than two-thirds of the assets in banking industry and 85% of non performing loans.

The government is considering consolidation of PSBs to tackle this menace. Instead of 27 PSBs, a lot of which need government assistance to survive, a few large banks are proposed that will be stronger.

It's true that only the fit ones should be allowed to survive. Especially now when the scenario is going to be more competitive with the entry of payment banks. However, as Mr Rajan had suggested, such an exercise could complicate the problem. Not only the merger will create cultural and autonomy issues to deal with, but will fail to address the problem of bad assets. It could even make the stronger bank suffer. Perhaps it will make more sense to privatise them once the clean up exercise is done. In the meantime, instead of blaming these banks, Government should stop interfering in their operations and avoid over burdening them with social sector schemes.

4:56 Today's investment mantra

"You only have to do a very few things right in your life so long as you don't do too many things wrong." - Warren Buffett