Buy and hold investing in India

Remember the market cliché about some of the best track records coming from those of dead people’s inactive portfolios? This comes from a supposed study that was done by Fidelity, in which they noted an internal performance review on accounts to determine which type of investors received the best returns between 2003 and 2013. The customer account audit revealed that the best investors were either dead or had forgotten about their portfolios.

This happens because emotions and opportunity costs are not a factor in dormant portfolios. Does that mean, one should not try to maximize returns from one’s portfolio by switching to better ideas? I don’t think that would be the perfect thing to do, considering the dormant portfolio data. I’ll tell you why. Imagine you were an investor in Wipro in Feb 2000 and somebody told you about inactive portfolios doing better than the active ones and based on that you’d decided not to sell. You’d have had 20 years of zero returns while the indices ran up multi-fold.

Very few companies survive the relentless onslaught of competition, technology, changing consumer preferences, changing government regulations and various other factors. See for example, the below list of top 50 companies by market capitalization in 1992.

Most of the above got replaced by better, sexier, smarter companies. And, most of the ones that did survive in today’s top 50, did so because of issuing new shares. Take State Bank of India for example. From a market cap of 22900 Crs in 1992 to 318,000 Crs today, SBI’s market cap grew at a pitiful 9.5% CAGR. I am not even getting into equity dilution which would chop shareholder returns down to much lower single digits.

Or take ITC, a much debated hot stock. ITC’s market cap went from 9000 Crs to 2.6 Lac Crs, delivering a return of 12% CAGR, excluding dividends. That ITC would grow at a faster clip, 2021 onward, when it is 28x bigger, and is likely to be much more bureaucratic than it was in 1992, will possibly become a case study in hope based “long-term” investing, in the future.

Going back to 1992, as investors who believed in the India growth story, and who wanted to maximize their ROI, why would we have stayed invested in SBI/ITC when there were much better fish in the pond, provided one knew where to look? Shouldn’t we have been looking for faster growing high ROE companies, than the below large caps?

Company	1992	2021	CAGR (excluding dividends,dilution,spin-offs)
State Bank of India	22905	318787	10%
Tata Iron & Steel	13793	86385	7%
ITC	9128	259594	12%
Reliance Industries	6654	1310616	20%
HUL	6369	544606	17%
Tata Engineering & Locomotive	5287	N/A	N/A
Associated Cement	4924	N/A	N/A
Century Textiles	4003	5225	1%
Grasim Industries	3660	92495	12%
Tata Tea	3516	N/A	N/A
Tata Chemicals	2986	18958	7%
Larsen & Toubro	2941	196339	16%
Gujarat State Fertilizers Company	2886	N/A	N/A
Colgate Palmolive	2766	41860	10%
Master Shares (Unit Trust of India)	2699	N/A	N/A
Cochin Refineries	2619	N/A	N/A
Industrial Credit and Investment Corporation of India (ICICI)	2475	N/A	N/A
Chemical and Plastics India	2133	N/A	N/A
Hindalco	2104	73500	13%
Bajaj Auto	2069	104174	14%
Brooke Bond India	2060	N/A	N/A
Indo Gulf Fertilizers and Chemicals Corp	1814	N/A	N/A
Gujarat Narmada Valley Fertilizers & Chemicals	1779	4456	3%
Jaiprakash Industries	1779	N/A	N/A
Shipping Credit Corporation of India	1762	N/A	N/A
Bombay Dyeing	1686	1468	0%
Essar Gujarat	1683	N/A	N/A
Great Eastern Shipping Company	1661	4513	4%
Tata Timkem	1530	9447	6%
Nestle India	1501	159778	17%
Castrol India	1479	12166	8%
Century Enka	1461	549	-3%
Indian Aluminium	1452	N/A	N/A
Motor Industries	1445	N/A	N/A
Britannia Industries	1379	84415	15%
Apollo Tyres	1328	14280	9%
Madura Coats	1308	N/A	N/A
Gujarat Ambuja Cements	1160	58557	14%
Indian Rayon and Industries	1144	N/A	N/A
National Organic Chemicals	1134	N/A	N/A
Raymond Woollen Mills	1124	N/A	N/A
Birla Jute Industries	1120	N/A	N/A
Oswal Agro Mills	1112	132	-7%
Ingersoll-Rand (India)	1104	2116	2%
Mazda Industries	1095	N/A	N/A
Siemens India	1038	64449	15%
Ashok Leyland	1028	33480	13%
VST Industries	1017	1017	0%
ITC Bhadrachalam Paper	1003	N/A	N/A
SKF Bearings (India)	963	10757	9%

Suppose an investor forgot about his large cap portfolio in 1992, 29 years later, in 2021, he would have realized what a poor idea it was, to leave his portfolio dormant. The top performer, Reliance Industries, delivered 20% CAGR, excluding dividends, while most of the remaining companies either ceased to exist or delivered single to lower double digit returns. I am not getting into what happened to companies where data is not available. And I am not inclined to calculate dividends either because we want to look at the most efficient way of calculating returns quickly. My hunch is that, at best dividends would add 2-3% to the above returns. It is not rocket science to understand that active investors who kept learning about companies did much better than the cumulative returns delivered by this dormant portfolio, including dividends.

Conclusions

• The answer to Buy and hold vs Buy and forget lies somewhere in between. Continue to hold companies that keep executing. For the ones that don’t, switch to better alternatives, because opportunity costs are real.
• Buy and monitor beats Buy and hold any day. As Ian Cassel says “Fall in love with companies that execute but be prepared to divorce quickly.”
• The above data is only for large caps. People typically invest in large caps for the certainty and clarity, the big companies provide. I agree with Ken Fisher, who once said “Clarity is almost always an illusion—a very expensive one.” As ROI focused investors we are better off investing in mid and small caps, even after adjusting for the risk involved in smaller companies.
• Most things in the market are contextual. What works in the west doesn’t always work in India. Buy and hold may have worked in the case of Fidelity’s investors who forgot/were dead. It certainly has not worked in Indian large caps.

Barath Mukhi
30th-March-2021