Why we are short on going long

Some tales are repeated so often that everyone comes to believe they are true. In the stock market, such tales relate to long-term investing and how retail investors can spin money from it.

So, we decided to zip back to 1994 and run the numbers on Indian stock market returns over the last 20 years, adjusting them for bonuses, dividends and stock splits. Slicing and dicing the data across sectors and time periods threw up some surprising results.

Here we go, using those numbers to demolish some myths about long-term investing.

Not really. You need to know which stock to buy and when to sell it. The twenty-year return on the Sensex, at 8.5 per cent annualised, isn’t exactly an advertisement for long-term investing. This is what you would have earned had you rejigged your portfolio every time the index changed over the years.

However, if you bought the Sensex 30 in 1994 and simply packed them away, your portfolio would by now be a shambles.

By now, eight of the original blue-chips (Bombay Dyeing, GSFC and Ballarpur Industries, to name a few) would have lost capital, two (Hindustan Motors and Indian Organic Chemicals) would have turned into penny stocks and a dozen of them (including Grasim, Indian Rayon and Century Textiles) changed beyond recognition by merging and restructuring.

The same findings extend to the rest of the listed universe as well. An investor who bought any old stock in January 1994 and held on till date would have had a two-in-three chance of losing money after the twenty-year wait.

This is because two-thirds of the 1,700 listed stocks have lost value over this period. As many as 80 per cent (yes, you read that right) have managed less than a 10 per cent annual gain, the bare minimum you would expect from equity investments.

There were big-time winners too, over this period. Stocks such as Infosys, Wipro, HDFC, Pidilite, Hero MotoCorp and Amara Raja Batteries (see table) multiplied money and minted millionaires. But with just 74 of the 1,700 listed stocks on the menu serving up a 15 per cent annual return, you had a less than one-in-ten chance of uncovering a winner without any special skills.

Data shows that if you are a disciple of buy-and-hold investing, shorter holding periods of five and ten years have worked better. Investors in 2004 had a one-in-four chance of hitting the bull’s eye over the next ten years. Those making their debut five years ago improved their odds even further.

A third of the stocks bought five years ago have delivered respectable returns.

Of course, these numbers capture the results for the last 20, 10 and five years alone and could change over time; but the results are based on the limited stock market history available in India.

Wrong again. What stocks you bought mattered much more than when you acquired them in the last two decades.

Those who added Larsen & Toubro to their portfolio in April 1993, when the Sensex languished at 2,100, would have notched up a handsome annual gain of 19 per cent till date.

But those who timed it badly and decided to hop on to L&T after the Sensex had doubled by January 1994 (4,000 points) would have still made a 17 per cent gain.

They may kick themselves for missing out on a 2 per cent annual return.

But not as much as the unfortunate chaps who plumped for BEML instead of L&T. They timed the market beautifully, but still saw their stock plummet by an annualised 3 per cent over the next 20 years.

Timing your purchases to market lows boosts your portfolio returns a bit, but it doesn’t make up for bad stock choices.

Timing-wise, one of the best buying opportunities in the market arose in end-2008.

But while the Sensex has more than doubled from that point, 40 per cent of the listed stocks have headed southwards.

In the inhospitable world of markets, it is far easier for oak trees to turn into deadwood than for acorns to flourish.

Those who’ve been in the markets from the Nineties may remember mid-cap names such as Patheja Forgings, Himmatsingka Siede, Panyam Cement and Thiru Arooran Sugars, then wildly fancied by fundamental investors.

With annualised returns ranging from a negative 16 per cent to 2 per cent, they’ve decimated wealth for investors who stayed faithful to them.

As a rule, investors who bought small- and mid-caps in 1994 (stocks with less than ₹500-crore market capitalisation) fared much worse than those who stayed with stodgy blue-chips. Fully 70 per cent of small- and mid-cap stocks have suffered losses if tamely held for two decades. Yes, the stocks that have turned out to be multi-baggers do include midgets such as Amara Raja Batteries, Motherson Sumi and Apollo Hospitals, which sported ₹10-20 crore market caps in 1994.

But you could have also pocketed very similar returns (with fewer sleepless nights) by investing in blue-chips such as Wipro, Dr Reddy’s Labs, HDFC, ITC, Nestle India, M&M and GlaxoSmithKline Consumer Healthcare.

There are good equity funds and then there are lemons. And given that funds own many stocks, they cannot deliver the astronomical returns that some stocks can.

But the other side of this coin is that the worst performing equity fund never fares as badly as the worst performing stock.

For one, even if they bet on duds, funds churn their portfolios periodically to replace them with better performers.

In the open-end structure, a fund manager who falls asleep at the wheel will lose assets in a trice. Two, fund managers seldom bet on stocks that are bereft of fundamentals. Both these factors work to contain the losses that even a really bad fund can deliver at your doorstep. There are just a handful of equity funds with a 20-year record in India; their returns from inception range between 8 per cent and 21 per cent on an annualised basis. None of them sport a negative return whereas the worst performing stocks over a 20-year period actually saw their values plummet to zero as they were suspended, turned illiquid or their promoters simply vanished into thin air.

Over a ten-year period, the worst fund served up a 1 per cent annual return while the best one earned 25 per cent.

Contrast this with the most terrible stock, which plunged from ₹123 to less than ₹1 in ten years.

Of course, the star performers such as TTK Prestige, United Breweries and Manappuram Finance (yes, even after the recent rout) galloped at over a 50 per cent annual rate since 2004.

The short message is, only a few, extremely lucky investors can hope to spot long-term winners among stocks and get rich by holding on to them through thick and thin.

For the rest, there are index funds or diversified equity funds. Simply by churning their portfolios often and replacing losers, they can remarkably improve your odds of earning that elusive 15 per cent.