Raamdeo Agrawal, the seasoned stock picker, has confirmed an investment technique that we have always believed in: Buy top quality Blue Chip stocks and let compounding do its magic. We found to our astonishment that a blue chip stock compounding at a sedate pace of 15% multiplies your money 4 times In 10 years time and 16 (!) times in 20 years. A blue chip growing at a scorching pace of 25% triples your money at the end of 5 years, increases it 9 times at the end of 10 years and a phenomenal 86 times at the end of 20 years (see Blue Chips Stock Portfolio: Compounding Multi-bagger).
Raamdeo Agrawal pointed out that the best strategy was to invest in blue chip stocks. He explained that investors suffer a lot more because of the bad quality companies bought at wrong prices. In good times they buy bad quality companies rather than good quality companies, even at high prices. Raamdeo Agrawal emphasized that if investors bought blue chip companies like Infosys or Hindustan Lever etc even at high prices, at least their capital was safe while if they bought very low quality stocks, they would have to suffer a very heavy – probably permanent loss.
He explained that investor usually shun buying blue chip stocks because they perceive it as “expensive“, “boring” and as unlikely to become a “multi-bagger“. However, this is a fatal mistake emphasized Raamdeo Agrawal. If investors bought high quality blue chip companies at reasonable prices, they would do very well at a much lower risk, literally half the risk. It was very clear that if investors bought a basket of blue chip companies, they would do very well without much pain in the marketplace.
He also cleared the misconception that blue chip companies were matured businesses and could not cannot create wealth as compared to mid-cap businesses which had the potential to scale up. Raamdeo Agrawal emphasized that even a stock like Hindustan Lever which had gone nowhere for the last 10 years, had reported a CAGR of 20% in 20 years while in the same period the market had a CAGR of only 13-14%. Raamdeo Agrawal also gave the example of Nestle, one of his all-time favourite stocks which if the investor had bought in 1991 even at a 64 PE multiple, he would have got a CAGR of 22% in the next 20 years in addition to the dividends and would have made a lot of money very quickly.
Raamdeo Agrawal emphasized that there was no point hunting in nooks and crannies looking for multi-baggers because “when you buy these companies, at times you may hit upon one or two lucky ones, but on the whole, when you look at after the event or in these kinds of times when you look at this portfolio, it is not even worth looking at it“.
Raamdeo Agrawal also underlined the importance of dividends. He said that “Actually, investing happens only for dividends” and pointed out that the true investors who come to the market for 10-15-20 years came for the dividends.
He left no room for doubt by stating “If there is anything important in investing, it is only dividends“. He gave the example of Hero Honda which he bought in 1997. At that time Hero Honda gave a dividend of 7 crores for the year. In 2011 Hero Honda gave a dividend of 2100 crores, 300 times in 12-13 years. While that was an extreme example, the dividend growth was 50-55-60 times.
He also gave the example of blue chip stocks like ITC, Asian Paints and Nestle and emphasized that the kind of dividend they have given in last 20-30 years was staggering even if the investor bought the stock at 1.5-2% yield and at 40 PE, he would have made a lot of money over time (see also TOP 10 BLUE CHIP SHARES FOR EVERY PORTFOLIO).