All these companies that have destroyed wealth of investors have a simple pattern. They failed to sustain, let alone grow, their revenue and earnings which market punished appropriately. And it’s not as if they happened to be in a sunset sector where all their peers were equally struggling. Wockhardt revenue and earnings started declining and never recovered while sector leaders continued to do well.
In every sector, we can find companies that have built strong franchises over the years not just with luck or a product breakthrough but great quality of management and ability to excute better than their peers. Such companies tend to enjoy their market dominance for very long time. Researches have proven a strong correlation between stock performance of a company and quality of its leadership.
So when you have companies with strong pedigree of leadership, uncompromising corporate governance and a track record of execution, you would expect them to do very well over a long period.
So you have long-standing sector leaders such as HDFC and Kotak in banking, TCS, Infy in IT, SRF, Pidilite in chemicals, Asian Paints in paints, Bajaj Finance in NBFC, Nestle ITC in FMCG, L&T in Infra, Maruti in automobile, JSW in steel, Ultratech in cement etc. These companies have maintained their market leadership over many years both in terms of business performance and market cap. They have superior capital allocations, cash flows and balance sheets than their peers. And no wonder they have also proven be consistent compounders over a very long time period.
Now if I built a portfolio of such consistent compounders and applied “buy and forget” strategy , what are the chances that I’ll end up losing my money or generating sub-index returns?
Looking at their historical returns over 20-25 years (quite a long holding period for an investor) the answer is absolute zero. Now there is no guarantee that history will repeat itself into the future and stock market is realm of possibilities. But statistically speaking I’ll be comfortable “buy and forget” strategy if I had these stocks in my portfolio.
Where I’ll NOT be comfortable with “buy and forget” strategy is when my portfolio composition starts veering towards substandard companies.
Majority of retail investors invest in tier 3 and 4 stocks in the hope of making quick fortunes. They will avoid sector leaders because they require a long time horizon to generate returns and not many have patience to wait for 1 year, let alone 10 years, for a large cap tier-1 stock to work magic through its compounding power.
So when these substandard companies start delivering superior earning performances during a sector specific bull phase, everyone gets excited and we see massive retail participation. When sector specific bull phase gets over and investors face the reality check most of their capital is lost. Every one wishes they should have got out in time.
So in a nutshell buy and forget is not a myth. It’s just that it doesn’t work with all the stocks. In the market you get what you pay for. You buy bad quality you get bad returns.
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