Why 'Long Term' is not what it is made out to be...

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Kavitha Menon |


Being a part of the Wealth Management Team, "Long term" is a word generously sprinkled in all our conversations with clients. Unfortunately more often than not client's perception of what 'long term' means is different from ours. We have heard various versions of the same, none of which does justice to this wonderful concept that adds the power of compounding to your equity portfolio and can create a substantial pool of wealth for self and progeny. Many investors complain about lost opportunities because they are long term investors, while many proudly produce fabulous returns using the same strategy. Let's see when long term isn't what it is made out to be.

"I only buy and never ever sell" – Long term investing, hardly means that you keep a company forever irrespective of fundamentals. Even long term investors SELL and it is not because they are trying to time the markets but it is because they believe that the price of the stock does not justify the value. Similarly investors in mutual funds and PMS need to sell to keep their asset allocations in order.

"I have lost a lot of money on my portfolio/trading position, but I have holding power" Evaluate you reasons for holding. Does your portfolio/stock have enough value to justify holding. If yes then your reasons for keeping the portfolio /stock are right. It wouldn't matter if fairly priced stock halves in price after you bought it. You cannot do much about irrational market movement, and holding on for the long haul will pay rich returns. But holding on to recover losses, if you have bought overvalued hyped stock is not necessarily going to do much for your wealth. Take an example of DLF or Unitech or other realty stocks in the heydays of 2007. If you are stuck with these stocks it may take several years before recovering capital on an inflation hedged basis. One can hope that these stocks will go back to their crazed valuations - only for that you must start praying really hard for divine intervention.

"I am a long term investor, I never sell before three months"- Just because you don't trade intra-day, doesn't make you a long term investor. If you have bought a stock on news /speculation with the idea to sell in a short time (even if it is year from now) you are not being a long term investor. We are always coming across potential investors who wish to invest in our equity PMS scheme with a 1-2 year horizon. It disappoints them when our team members dissuade them and instead advise debt investments. For value investors like Warren Buffet, an ideal holding period is forever. Now that's really long term!

"I only buy bluechips for the long term" – 'Bluechips' in the stock market change every season just like fashion trends. What was bluechip today may not even be worth a chip tomorrow. Don't take my word for it. Check out 'bluechip' stocks of the 1990s. Many of them are not even listed today while many others languish in T or Z category of the exchanges .So don't think that buying only index or A group stocks is a sure way to long term wealth. You can find a valuable stock anywhere. As a long term investor, market capitalization, macro factors, and short term fluctuations should not define your reasons for buying a stock.

Being a long term investor does not stop with your buying decision. By monitoring financials, business growth and management quality, it continues throughout the life of the investment. It requires patience, continuous study and discipline. 

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