Cut the Noise and Hold these Stocks FOREVER

Jun 17, 2021

Editor's note: Before you read today's edition of the Profit Hunter, I recommend you watch Tanushree's urgent video. Our co-head of research has identified 20 stocks with 10x potential to own forever. Click below to watch the video.

While I was growing up, my father, an investor himself, had a peculiar way of teaching me things in life.

He used to narrate stories of success and failures in the stock market and linked the journey and outcome of those stories to the virtues of life.

Qualities like patience, persistence, greed, fear were all taught to me through the stock market route.

In hindsight, the most important virtue which I learnt was patience.

His golden words were "You will never get anything before time and more than what you deserve".

As I was preparing for my CA examination, I was introduced to the concept of compounding in financial management or as we call it CAGR (Compounded Annual Growth Rate).

In baniya terms it is nothing but interest on interest.

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Albert Einstein called compounding the 8th wonder of the world.

What if you slowly and steadily become 1% better than what you were yesterday every day?

The results are staggering over a year.

1% improvement compounded every day can be shown this way: 1.01^365 = 37.78.

This means if you make a 1% improvement per day, you are 37 times better off after a year. As opposed to 4.65 times on a simple interest basis.

Now that's an ocean of a difference.

In terms of behavioural finance, compounding is nothing but patience.

The ability to do nothing after you have made an investment is probable the most underrated quality in investing.

Most people always talk about buying the right stock.

Some people talk about selling stocks at the right time.

Hardly anyone talks about holding the stocks for years and decades.

I came across a story on the internet which tells us the importance of patience in life as well as investing.

The story of the Chinese bamboo.

Like any plant, the Chinese Bamboo Tree requires nurturing - water, fertile soil, sunshine.

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In the first year, there are no visible signs of activity or development. In the second year, again, no growth above the soil.

And the third and fourth, still no signs.

Patience is tested and we begin to wonder if our efforts will ever be rewarded.

Finally in the fifth year - voila! There is growth.

And what growth it is!

The Chinese bamboo tree grows 80 feet (nearly 30m) in just six weeks.

So the question is, does the Chinese bamboo tree really grow 80 feet in six weeks? Did it lie dormant for four years only to grow exponentially in the fifth?

Or was the little tree growing underground, developing a root system and a stable base strong enough to support its potential for outward growth in the fifth year and beyond?

We all have heard stories of people funding their children's marriage or education by encashing on their investments in shares of MRF, Asian Paints, HDFC Bank, Infosys...

The key here is time frame - 10, 15, 20 years holding an investment which funded one big life expense.

So then, why is holding stocks, which is considered the most important thing in investing, also the most difficult aspect?

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Imagine you have an investment in a stock and a property.

Unlike the price of a stock which you check at least once a day, how many times do you check the price of the house with your real estate broker?

I guess once every few months, at the most.

The problem is the more access you have to price fluctuations the more you are tempted to act on it. It becomes hard to resist the temptation to sit patiently.

Human minds are wired to 'act'.

There is one more reason for interrupting the compounding process. It's called the demonstration effect.

Let's say your neighbour purchased a so called momentum stock.

Every time you bump in to him, he brags about the returns in those stocks. You on the other hand have the best quality stock but it's compounding slowly as opposed to his momentum stock.

There is a good chance you will sell your quality stock and enter his momentum stock, just because it's the fad in the market. It's human nature to be greedy.

That's where people go wrong.

Compounding is a slow but sure process. It works as long as you pick the right stock and have conviction in the management and the business.

The stock market is a mechanism to shift money from the impatient to the patient.

Warren Buffet made 99.7% of his wealth after the age of 52.

That's the power of compounding.

But can this approach of 'buy and forget' be followed on a blanket basis?

Definitely not.

If you would have followed the buy and forget approach in cyclical stocks like metals, infrastructure or even autos the chances of wealth destruction would have been higher than wealth creation.

And don't forget the added stress of getting the timing right in these cyclical sectors.

If you get the timing right in cyclical stocks, you will make money. However, true wealth is created in Forever Stocks.

These businesses will have moats - brands, lower ticket sizes, up trading opportunities, scalability, to name a few.

So while we all talk about wealth creators of the past with the likes of MRF, HDFC Bank, and Asian Paints the real talent is in finding the big wealth creators of the next decade.

The next HDFC Bank could be HDFC Bank itself or could it be a small bank with strong lending practices and a hungry management focusing on fintech to gain edge.

The next Infosys could be Infosys itself or a company set up by a group of friends focussing on artificial intelligence.

That brings me to my colleague Tanushree who has an eagle's eye in spotting the next set of compounders.

She calls them Forever Stocks.

And she has discovered 20 of them in the Indian stock market.

Tanushree will talk about these stocks at her special online event - Forever Stocks - this coming Monday, 21 June.

I'm looking forward to it. I hope you are too.

Register for Tanushree's special event here.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

PS: Join Tanushree online on 21 June at 5pm. She will tell you all about Forever Stocks. These are the only 20 stocks you need to own to become extremely wealthy. Book your seat here.

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