We all hear a lot “Invest in blue chip stocks and hold for at least 5 to 10 years” and “Be long term investor”.
Is investing in the market that simple?
Let us do some analysis and see if investing in blue chip stocks in for the long term just enough?
So let us take the 30 Sensex listed companies as of today. Get their price on 21st Feb 2011 and compare them with 21st Feb 2016 price. The chart is as follows.
|Price 02/21/11||Price 02/21/16||Profit / Loss||Double Money||50% Profit|
|Bharat Heavy Electricals||420||100||Loss||No||No|
|Dr. Reddy’s Laboratories||1500||3050||Profit||Yes||Yes|
|Vedanta (Was Sesa Goa)||310||75||Loss||No||No|
|Tata Motors (+Rights Issue)||240||315||Profit||No||No|
|18 Profit||8 Yes||14 Yes|
If you invest in the best stocks in emerging India, your probability of being profitable after remaining invested in the market for 5 long years is mere 18 out of 30 or 0.6 or 60%.
It can also mean that 40% chances are if you select the best stocks in the business and remain invested for a period of 5 years you can still be making losses.
People have very high expectations from market but in 5 years only 8 (Maruti, TCS, Sun Pharma, Lupin, L&T, HUL, HDFC Bank, Dr Reddy’s Lab) out of 30 stocks doubled. Or if we become slightly lenient in calculations 11 (ITC and M&M or HDFC) out of 30 stocks doubled in 5 years. So only 35% chances are you will actually double your money in 5 years investing in blue chip stocks.
Can invest in right sector help investing in blue chip stock for a longer term?
You can argue that the metal sector has under performed and Pharma and FMCG sector has outperformed and so just knowing the next best sector is good enough.
What about the IT Sector than. TCS has outerperformed and Infosys hasn’t. What about the banks. HDFC has outperformed and ICICI bank has tanked.
Buy and hold strategy allows you to buy the best stock in the business at any price and hold longer and you will eventually make money out of it. Does not look right.
If you purchase anything that is too costly, you will actually get started to worry about recovering your investment and make nothing out of it.
So what’s wrong in buying blue chip stocks for the long term?
The answer is price at which you bought it and the time when you purchased it.
Stocks in market are not always available at a fair price. Sometimes they are over valued and sometimes they are undervalued. If you provide a very high premium price for blue chip stock, you are sure to not able to make money out of it for a fairly long period of time and ultimately may just come out of it at no profit no loss kind of scenario.
Good stocks will be trading at a higher premium but at what premium it may provide good value is what every investor needs to calculate.
Let us take an example of investing in a property which we Indians understand easily.
You want to buy a property and so will you buy it a few times it’s worth or evaluate the fair value of it? Stocks are no different.
We always buy property at fair value and so more often make a profit from it but when it comes to investing in the market, we are fine paying any price. If you buy a property at a very high premium, you will not be able to make money in the coming years as well.
So why buy and hold theory exists in the first place?
Just to make you feel good that what you are doing is not right and you should be doing it the other way where you should be investing in the market and remain invested.
So instead of just being a long term investor in any stock at any price, try to be a long term investor investing in the right stock at the right time and at the right price.
If you cannot get the stock at the right price, wait for it to get to the right price. Remain liquid so you can cash in when it is the right time to enter into a stock.