How My 'Light Bulb' Moment Made Big Money for My Readers

Aug 17, 2020

Rahul Shah, Editor, Profit Hunter

For a good part of my career, I was the classic 'Buy and Hold' investor.

How could it be otherwise. I had earned my spurs at the Warren Buffett School of investing where holding a good quality stock forever was what separated the men from the buys.

If you didn't believe in buy and hold, you were not a part of the tribe. It was as simple as that.

And then investment experts and fund managers who had their own axe to grind, muddied the waters further.

'You are doomed if you keep moving in and out of the market', they often told us.

'It is the time and not timing that matters in the stock market', they added further.

Of course, they had the numbers to back their claim.

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Buying and holding a basket of good quality stocks like the Sensex has earned you in the region of 13%-14% CAGR historically.

But strip out the best 20 or 25 days and returns crash to a mere 4%-5% CAGR.

Yes, that's right. In the stock market, it is the tail that wags the dog of long term returns.

Stay out of the market on the few days that matter and your returns reduce to a pittance.

And since you don't have a crystal ball to know which day the Sensex will have a strong up move, 'Buy and Hold' is the best option.

It was hard to argue against this point. Buy and Hold occupied a permanent residence in my thought process.

Well, it took the towering intellect of none other Benjamin Graham to strike at the very foundation of this idea.

Back in 2012, I came across a fascinating interview of the father of value investing where he recommended a strategy that was polar opposite to Buy and Hold.

'Stocks, irrespective of the sector they belong to, often rise and fall together', counselled the sage. Therefore, your strategy should be in sync with their rise and fall.

In other words, you should take maximum exposure to stocks when they are attractively valued and minimise your exposure when they turn expensive.

This advice from Graham left me perplexed at best.

How do I reconcile the advice given by the Guru with the one advocated by its most famous pupil i.e. Warren Buffett?

If I minimise and maximise exposure to stocks as per Graham and thus, keep moving in and out of the market, am I not exposing myself to the risk of missing out on the best days? Am I not setting myself up for a disaster?

Well, not exactly if the following chart is to be believed.

You see, we have been told only half the story.

Sitting out of the market even for a small period of time is indeed a bad strategy. But you know what can make Buy and Hold look like a bad strategy? It is avoiding the worst days.

As the chart highlights, if you had stayed out of the worst 25 days of the stock market over the last 30 years, you would have multiplied your money almost 300x. Yes, that's correct. No extra zeroes.

If you could have made 7x more money by being Buy and Hold as opposed to missing the 25 best days, you could have made almost 8x more money than Buy and Hold by missing the 25 worst days.

In terms of CAGR, it works out to a Buffettesque 21% versus 13% for 'Buy and Hold'.

Well, it is just the way compounding works. Big losses can peg you back so much that recovering from them needs a herculean effort in terms of returns.

Little wonder, all the great investors extol the virtues of minimising your losses over maximising gains.

All of a sudden, staying out of market doesn't look that bad anymore, does it?

While it could lead to missing out on the best days, it could also mean steering clear of the worst days.

As far as investing is concerned, it is the latter that provides a more powerful booster shot to your long term returns.

It was Benjamin Graham that made me see the light here and then the chart above helped complete the circle.

Ever since then, I have become less of a supporter of 'Buy and Hold' and have advocated moving in and out of the stock market if the underlying valuations so demand.

And how has it worked for me and my subscribers?

Well, the results have been beyond expectations. This strategy has helped my subscribers stay out of the worst stock market days in recent years.

Be it the crash of 2018 or the Coronavirus led meltdown, this strategy side-stepped both with minimum damage.

This strategy is the reason my subscribers kept almost all the money they made between 2014 and 2017 with themselves and not give it back in the 2018 crash.

And this strategy is why they were sitting on a lot of cash right after the Coronavirus meltdown and got into stocks that are up as much as 90% within a few months.

Thus, staying out of stocks during its worst days not just keeps you away from big crippling losses, they also keep your powder dry for the coming bull market.

The best of both worlds if you ask me.

This is exactly the reason my confidence in this strategy has grown by leaps and bounds over the years.

I strongly believe that you should devote a part of your corpus to this strategy and capitalise on its clear long-term advantage.

Good Investing,

Rahul Shah
Rahul Shah
Editor, Profit Hunter
Equitymaster Agora Research Private Limited (Research Analyst)

PS: Get access to Tanushree Banerjee's top 3 unstoppable tech stock recommendations here.

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