I believe that, Buy & Hold can create very good wealth if an investor understand the longevity of the business, its moat – whether it is expanding or shrinking, consistency in its earnings, ability to understand whether the competition will eat into its business or not.
Imagine, that, an Investor decided to stay invested in IT company after seeing success of Infosys, and due to wrong management decision, stock corrects in a year by 50%, then how many investors will be comfortable with the idea of holding it for very long period, say 20 years. It depends on the temperament of the investor. There have been many failed IT companies with same business model like Infosys. In the hindsight, Infosys looks like a great investment, but think of failed IT companies as well.
How many investors would have predicted that, Cyclic business like HDFC Bank would give massive returns if you bought it at IPO and hold for 30 years? Banking is a high risk business. For every successful HDFC Bank, there are many failed banks. So it is not that easy to select the Buy and Hold candidates.
Even HUL has gone through tough situation and the stock price has not moved for a decade or so. It is difficult to hold onto the stock for 20 years if it does not give any returns for 10 years out of those 20 years.
What might work for many middle class investors is to Buy stocks which look undervalued using some common parameters and sell when those get extremely overvalued, and use the profits booked for your Financial Goals. This way, you reduce the risk of remaining invested in overvalued business, and also achieve your Financial goals.
I may be wrong in my analysis, as I believe in buying when stocks are undervalued and selling when those stocks get overvalued, as per my own analysis. I follow this approach, as I use the profit booked to achieve financial goals or at least move ahead towards achieving the financial goals.
My direct equity portfolio is distributed across few Financial Goals. So when profit is booked in some stock, then I see, if I can allocate some part of it to the specific Financial Goal by investing that amount in FD/Debt Fund for that goal; and remaining part of the profit is reinvested in next undervalued stock as & when an opportunity is presented.
This process has given me reasonably good results, as few Financial goals have been achieved ahead of time or on time.
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