Buy and Hold : Not as easy as it sounds!

It has been rightly said by a stock market veteran Peter Lynch :

"More money has been lost trying to anticipate and protect from corrections than actually in them."

Below is the chart of one of the best performing large cap companies. Finolex Cables, as most of you are aware, is well-known cable company.

NOTE : The stock was available at a sheer price of 55 Rs back in March'2013 and today it is standing high around the levels of 700+ in March'2018.

The stock has gone up more than 10x in the last 5 years. Put another way, the stock has gone up at a compounded annual rate of 40%, without considering dividends, for the last 5 years. A great stock for any buy & hold investor and as mentioned in my last piece someone who held on to such a stock for the entire period would have done extremely well due to the power of compounding.

Interestingly you can see from the above graph that while the stock went up on 628 days it also went down on 591 days! The reality is that stocks go through periods where values decline or stay flat. These periods could be long and declines can be huge. We are going through one such period right now. The key is how do we react to these declining and flat periods and that determines what return we ultimately get.

In this particular case, the reason for the fall was nothing to do with Finolex Cables, the stock was down due to Global Financial Crisis. With all the negative news floating around that time what would you have done? If you were like the majority, you would have either booked your loss or would be very tempted to. Even if you did not book the loss, you may wait for the first opportunity when the stock is back at your cost price to get out feeling good that you did not lose money.

If you had booked your loss or got out at cost price and not invested again, you would have been in the RIGHT stock but would have got the WRONG return.

Suffice to say that Emotions like Greed and Fear, mental strength, and individual personality traits end up playing a huge role in the decision making and override rational investing decisions.

Thus, once the right stock is identified, the most important trait required for a successful Buy & Hold Investor is Strong Emotional Control .

This trait is very difficult to find. Possibly the main reason why investors who have this trait do so well is that the majority of us lesser mortals do not possess these attributes.

Of course, I have assumed here that the “right” stock has been identified.