|»5 Minute Wrap Up by Equitymaster|
On This Day - 7 AUGUST 2018
The Stock That Goes Up 4 Times Every 10 Years
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Mr Sharma and Mr Patel once lived in the same neighbourhood. They were colleagues and good friends. Both started investing when they joined their first job in 1990. But did it a little differently.
Mr Sharma was always a firm believer in physical assets. He had inherited some gold from his parents. And was determined to accumulate a lot more of the yellow metal. So that he could not just be carefree about his own retirement, but also leave enough for his future generations. Buying gold was hassle-free. And putting the new gold bars in the bank locker was extremely satisfying.
His friend Mr Patel, however, was keen to see his savings work. Quite literally.
He accidentally happened to read a book called 'One Up On Wall Street', which had been published just a year back, in 1989. He knew nothing about the author Peter Lynch. But the book had captivated his imagination about creating wealth. So, Mr Sharma decided to try it for himself. But initially with a small capital.
Following Peter Lynch's advice, he identified companies which sell his favourite products. He also made sure that the company had been around for a while, done well financially and could last decades. So, first he bought some stocks of Hindustan Unilever, followed by some Asian Paints and then Titan.
By 1995, both Mr Sharma and Mr Patel had invested about Rs 50,000 each of their savings in gold and stocks respectively. Both had very similar dreams and aspirations. Both were diligent about their investments. And hoped that they don't go wrong.
The only difference was that Mr Sharma could already boast of having a kilo of gold in his locker. Something that he could barter for a brand new Maruti 800 any day.
His friend Mr Patel, on the other hand, was facing some agony. Not only did he not have much to boast about, but his investments seemed to be going through a rough patch. The BSE Sensex had corrected by about 20% between January 1994 and January 1996. It was tough for him to stick to his conviction about the stocks. But he did.
The same thing happened in 2003.
Eventually, the two friends changed jobs and moved to other cities.
But every few years, they caught up and discussed about their investments. And it was only Mr Patel who had loads of stories to tell. He talked about how much his favourite stock had fallen in the recent market crash. And how he got the opportunity to load up on it. He was convinced that his family would spend even more on the products that the companies produced, over the years. So, the stocks hedged that risk.
Mr Sharma, on the other hand, kept wondering how much more rental he will have to pay the bank for storing all his gold. Even though he was quite satisfied about the fact that gold would always be a good inflation hedge.
2008 turned out to be the year Mr Patel had been eagerly waiting for.
Stocks of the companies he only dreamt of buying were falling like pack of cards. He already had saved up enough capital for the right opportunity. And knew that it was a 'now or never' chance for him to really put his savings to work. Over the next twelve months he diligently bought the stocks he had carefully studied for years. The market's gyrations did not worry him. For by now he fully understood what Peter Lynch wanted to convey in his book. And had also managed to follow Buffett's golden advice to keep 'margin of safety' in his stocks.
That Mr Sharma kept telling him to move from stocks to gold did not shake Mr Patel's conviction one bit.
What do you think happened after this?
What if I asked you to complete the story?
Well, factually by the end of 2017, Mr Patel, would be at least two times richer than his friend.
As much as Mr Sharma was right in protecting his capital, he did not take the effort to make it slog. And as a result, over the decades, his capital was safe, with an inflation hedge, but nothing more.
Mr Patel's efforts to see his savings grow, that too in the safest possible manner, yielded big results over the years. Not only did his savings work harder, but they also compounded. And over several years, the result was magical.
If a movie producer had to adapt this story, he would have to show Mr Sharma driving a BMW and Mr Patel a Rolls Royce. He would have to show Mr Sharma living in a sprawling apartment in south Mumbai and Mr Patel in a sea facing bungalow.
You get the drift?
Well, like in a movie, this story also has several missing parts. Mr Patel would have certainly not got all his stocks right. But the majority that did, paid off brilliantly.
Also remember, the turning point in his investing journey was 2008. The stocks that he bought that year went on to multiply 4, 7, 9 and even 11 times in the next decade.
And why not? These stocks were compounding machines. Bought at a good discount and held for a long tenure, they were certain to pay off handsomely.
And did I tell you that the dividends these companies paid funded Mr Patel's family vacations abroad, all through the decade?
Wish you were in Mr Patel's shoes in 2008? Well. It's not too late! For I have already identified a stock that has multiplied 4 times every decade. And is set to repeat that feat.