I got a question on a discussion forum, about Long Term Investing. I found the line of thought very interesting, and my reply is in the form of the Seven Steps to Long Term Investing Success !!
So here goes. (thanks Srini and Musa). ..
First the Question
Need some advise.
I intend to invest some X amount in some select stocks with a holding period of about 8-9 years.
Is it good to leave it untouched till the end of holding period? Or is it advisable to set some yearly target say 20% or so and exit once the target is achieved in a year and wait for some lows to happen to reenter the stock for a target n exit once again and continue this cycle till the end of Holding year.
I don’t know how the above approach of mine sounds, but need you to give me some thoughts on how to go about it.
Here’s my Answer.
The Seven Short Steps to Long Term Investing Success
This is a pretty good question.
The investing process I feel you should follow is:
- Stock Selection:Obviously, choose your Select Stocks well. Since the holding period is 8-9 years, you need to look closely at the fundamentals. Each stock needs to have an investment thesis (eg. capacity expansion of 200%, or a new product launch that can grow profits 150%) and a price target for a specified period of time like say 2-3 years. These need to be high conviction ideas. Plus good Portfolio thinking is that there should not be an overexposure to any one sector, to reduce overall sector risk.
- Investment: Buy the Selected Shares. One way to simplify things is to buy shares of roughly equal monetary value.
- Monitor the Stocks:Next these shares need to be monitored. Is the investment thesis being played out in reality? Any external events affecting it? A six monthly review for these Select Stocks may be sufficient.
- Minimize Transactions:I would disagree about the 20% annual targets and exit /entry cycle. Good well chosen shares may appreciate even 100% in a good year, yet may still be cheap and worth buying, even at this level, if the 2-3 year outlook still looks good. Every delivery based entry and exit can cost you upto 0.6% of your asset, so transactions should be minimized for long term investments.
- Use Dips to Buy:Also the reverse may also happen. The investment thesis may be playing out well, but the share price may have fallen 20%. You need to be patient here, and can even buy more of this stock if you have funds.
- Exit Non-Performers:My approach would be to (on Review) sell those Stocks that are not performing on fundamentals as per the investment thesis (this may or may not be reflected in the price performance) and perhaps buy more of those that are performing. There is no shame in admitting mistakes. Even investment greats like Anthony Bolton (I’m reading a great book by him called Investing Against the Tide) talk about a success/ hit rate of 55-60%. The secret is to identify mistakes and reduce losses by exiting fast.
- Time in Market:Over the 8-9 years period a good internal price target to have is to get a 20% annualized return for your Select Stocks. But notice that big returns come in a few years and things may be flat to negative for the others. So I prefer “Time in Market” with “Good Stocks” where you will get the returns over time.
Thats it !! I guess many years of investing have helped me give a short and sweet answer.
Sorry for generating Option 3 compared to 1 or 2 asked by you, but this is my recommended approach.
Here’s to your investing success.
(needless to say, revert to me if you need help with choosing stocks, monitoring and review )
Regards, Punit Jain
Bangalore, Founder, JainMatrix Investments
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