How long should you hold a stock? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

How long should you hold a stock? 

A  A  A
In this issue:
» Subbarao not keen on new banks
» Not a good year for smart money in India?
» After US its UK's turn to be downgraded
» Will spending cuts push US back into recession?
» and more....


Last 4 Days to get Flat 70% Off... (Act Now!)

We've never offered our Small Caps recommendation service at this price!

In fact, even when we launched it 5 Years back; it was double of what you can get it for today.

And if you look at the amount of efforts that go into it and the Outstanding Performance we had in 2012, this doesn't even seem right...

So, why are we doing this?

The main reason is that we want everyone who is interested in investing in Small Caps to profit from our experience.

So, Don't miss this opportunity... This Offer ends in Just 4 Days!

Click Here for Full Details!


00:00  Chart of the day
 
When it comes to investing, it is necessary to do your homework. Studying the financials of the company, meet the management; evaluate performance against the peers, etc. These are just some of the points that you cover when judging if a stock can be invested into or not. After doing the groundwork, you study the company's valuations. If it is available at cheap and attractive valuations, you go ahead and invest your money in it. But having purchased the stock, the big question is what next? How long should you hold the stock for it to deliver that fantastic performance that you want and expect?

The answer to this question should ideally be never. But unfortunately not everyone would go for this option. So we decided to discuss the other options available. To understand the options better we collected some statistical evidence. The data we have taken is for the BSE-Sensex to show shows the returns investors would have fetched had they invested in the BSE Sensex 10, 5, 3 and 1 year back respectively. The following chart gives the CAGR returns that you would have earned on the closing price of 22nd February, 2013.

Source: BSE

It must be noted here that the 5 year performance looks depressed because of bull period that Indian markets enjoyed till 2008. Nevertheless, the picture is still quite clear. If stocks were held for one year or a three year period, the compounded annual returns. (CAGR) that one would earn would be a meager 6%. On the other hand, if you had held on to the stock for 10 years, the CAGR would have been an amazing 19%. And this is just the returns in prices. It does not include the returns earned through dividends.

This gives a fair idea on how long the stock should be held. The answer is for a long term horizon. The thing is that there can be periods of time when irrationality and emotion, rather than fundamentals will drive stock prices. And such periods, of excessive greed or fear, could last for months, if not years. But sooner or later rationality is bound to return to the market and then, stock markets have to value companies based on what they are truly worth. Naturally one cannot expect this to happen in short term periods. It can only happen in the long term.

So the recipe to get rich through investing is actually a simple one. Do your homework. Buy the stock at cheap valuations. Then sit back and rest. In the long term, you will reap spectacular gains for sure. But remember what we are advocating is a Buy and Hold approach. Not a buy and forget philosophy. Periodic checkups are necessary to ensure that the fundamentals of the company are intact. And as long as they are, continue to hold it for a long term.

How long do you think you should hold a stock? Let us know your comments or post them on our Facebook page / Google+ page

01:30
 
Monetary Policy is not the only bane of contention between the RBI and Finance Ministry. Issuing licenses for new banks is another hot cake that Finance Ministry is rooting for. But given the conservative central banker that it is, the RBI is difficult to coax. Nevertheless, it did have to give in and come out with guidelines for new licenses recently. And true to our suspect the same pose enough barriers to unworthy bankers. It is no secret that many corporates and NBFCs in India were looking forward to the guidelines for setting up banking business. Many are also armed with sufficient capital for the same. But if RBI's guidelines are to go by, those with questionable reputation will find the going tough. The RBI has enough reason to be cautious about new entrants in the banking sector. For there is hardly any bank that has not invited the regulator's wrath at some point or the other. We are glad that only the best and most deserving will get a chance.

02:10
 
What's on your investment shopping list for 2013? Bonds, equity, or gold? Well, depending on how clairvoyant you are, you can pick and choose depending on your view on growth and inflation. But, since none of us really know what the future holds, maybe the sensible thing to do will be to diversify. According to an article in Business Standard, based on the current environment, portfolio returns will largely depend on reading government and central bank policies correctly. And that returns may not necessarily be driven by fundamentals. In other words smart money and dumb money will fetch the same returns. So why delve too much into fundamentals right?

The truth cannot be more far away from this. True that in the short term there may be a disconnect between returns and fundamentals. But over the long term these differences are smoothened out. If you were a long term investor then you know that eventually smart money will triumph over the dumb money. Pick up stocks that are fundamentally strong. And hold them for a long term.

02:45
 
One by one the dominoes seem to be falling. First it was the US, then came countries like France and now the UK. The Queen's country is the latest to face the axe on its credit ratings. It has seen its ratings cut from triple A to double A1 by none other than Moody's. And to make matters worse, UK's economy is showing hardly any signs of a full blown recovery. This thus puts the policymakers in a tangle we believe. Any further loosening and it could face a fresh round of downgrades. While on the other hand if it tightens more, the economy will slide further into the danger zone. The good thing though is that the credit markets are hardly taking a note of this development. For the cost of holding UK Government debt has barely budged. This trend however cannot continue for long. The deficit will have to be reduced and the best way to do this as per us is to take some harsh steps and bear the short term pain that will come from it. The economy will be better for it in the long term. Continuing with a loose monetary policy will only prolong the problem and could lead to an even bigger mess.

03:20
 
Loose monetary policies, indiscriminate spending and reckless practices by bankers were all responsible for the global financial crisis in 2007-09. Thus, it is only follows that such excesses will have to be cut down. The US Fed has been banking on the idea that if its pumps more and more money into the economy, Americans will be induced to spend. Nothing has been further from the truth. Unemployment is high, Americans are in no mood to spend and the only thing that these quantitative easing programs have done is to add on to the already massive debt burden. But the debt has to be cut down drastically. Naturally, the US is in a quandary. Starting March 2013, the US will face the reality of US$85 billion in across-the-board spending cuts. The cuts, known as sequestration, will lead to dismissal of teachers and firefighters. It will also reduce projected spending by US$ 1.2 trillion over the next nine years, with half in defense spending and half from domestic spending. Many feel that unless the Democrats and the Republicans come up with a plan to avoid this, the US will push the US back into a recession. But we feel that eventually the US will have to bear the pain of the crisis; something it has only been postponing until now.

04:10
 
There is no denial of the fact that the Indian economy is in bad shape. Industrial production has come down. GDP growth has come down to its lowest level in a decade. Foreign direct investment (FDI) has slowed down. And now fresh order flows of domestic companies has pointed to a deepening slowdown in the Indian economy. Indian companies' new order inflows in the quarter ended 31st December, 2012 stood at the lowest level in nearly four years. The slowdown is worse in investment-related sectors like construction, infrastructure and power. The dire need of the industry is the availability of cheap capital by way of cut in the interest rates by the Reserve Bank of India (RBI). The government should also provide policy measures to boost growth.

04:40
 
In the meanwhile after opening the day on a flat note, Indian equity markets did move into the positive zone. However by noon the markets had erased most of the gains. At the time of writing, the Sensex was down by 35 points (0.2%). Barring Korea and Taiwan, the other major Asian stock markets have closed the day in the green. Europe too has opened the day on a positive note.

04:55  Today's investing mantra
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger

Charlie Munger - Investing Lessons
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.

Equitymaster requests your view! Post a comment on "How long should you hold a stock?". Click here!

4 Responses to "How long should you hold a stock?"

shamsundar

Feb 27, 2013

i do not recommend buy and hold stock. it only leads to paper profits. the profits keep vaxing and waning periodically as per the perceived sentiment of the market. Instead, it should be buy and trade strategy. one should keep buying at attractive levels with surplus money. As the market keeps going up and down, one should sell at higher prices and buy back at lower prices with suitable trading strategy.

Like 

Anant

Feb 26, 2013

True the gains on Sensex was spectacular between 2002/3 and 2012/13 due to unprecedented Bull run of 2003-2007 with a few bumps in 2004 and 2006. What about the gains on Sensex during the decade from 1992/3 to 2002/3? Negative? Pl throw some light on this decade as well as we expect Equitymaster to be unbiased and justify holding stocks for long term through all phases of development and growth of the economy.

Like (1)

R V Iyengar

Feb 25, 2013

As for me I follow the following methodology.
1. Check as to what is the returns in the recent one year.
2. Check If the returns are good and the prospect for next year are good.
3. Do I need the money for some specific purpose. If not is it for only switching the investment.
4. If for investment only, which is the other stock or an avenue where I can expect a better return.
5. If you can identify such a prospective avenue to shift your investment sell it and reinvest in the better stock.
6. If the CAGR and the projected earnings for the next year are acceptable to you don't sell!

Like (1)

SWAPNIL

Feb 25, 2013

I don't know but incomplete answers brings havoc and same thing with periodical checkups of our investments and the company in which we see safety for our vitamin M market where fundamental changed overnight with Satyam like IT giant and RIL KG-D6 block earlier assumed nothing less than a wonder in petroleum exploration and one more feather to the crown Kingfisher Airline India's only five star and once highly admired airline. So is everyday checkup required every moment checkup required or one has to see how fortunate he is to check up just before strong move of its stock.
conclusively we all have to take shelter to a professional dedicated completely in market unless become an active investor having third eye on market incessantly.

Like (1)
  
Equitymaster requests your view! Post a comment on "How long should you hold a stock?". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407