One of the oldest and time tested way of making money from stock market is to buy and hold for long term. Some of the richest investors have practiced and advocated long term investing, and their success story and track record proves that it works.
But if we look at the other side of the coin, there are ample evidences suggesting that long term investing is dying, if not already dead. Better technology, easy accessibility to information, transparency, has given birth to many disruptors.
Long term investment is dying, and here is the evidence:
If we look at global companies, Wal Mart, one of the largest retailer is now forced to shut shop because of Amazon, an online retail platform that is able to cater its customer in an efficient manner at lower price.
A recent news is another strong evidence. GE(General Electric), one of the oldest companies to be a part of Dow Jones Index (since 1896) has been dropped out of the list of stocks that form the index due to its poor performance. The stock of GE fell about 50% in the past 1 year. Recently Apple has become a part of the Dow index.
Even if we look at the domestic market, there are many companies that were once the darlings of long term investors, but today are suffering heavy losses. Companies like Tata motors, once a market leader in commercial vehicles, suffered a loss of approximately Rs. 2,330 crores in March 2017. Similarly, One of the largest private sector bank SBI, has suffered a loss of Rs. 12,000 crores last financial year.
All these evidences, both domestic and foreign suggest that long term investment is no longer a great way to make money from stock market. So does it mean that principles of Warren Buffett are no longer applicable in the internet era and we should reject his idea of money making? Here is what I have found
Busting The Myth:
The main criticism of long term investing is that we live in a world that is continuously changing. Neither profits, nor market share, or business models remain stable for long time, so the best course of action is to buy and sell.
After all how can you say what is going to happen in the next ten years? We may have a War with enemy nation, the crude price may skyrocket, or we may even see world war 3.
Critics who put these arguments to support their theory must know that the world has already survived two world wars, multiple recessions, and economic bubbles. Market makes no promises, or guarantees, instead provides a level playing field to each and every investor, to succeed.
There are ample evidences suggesting that long term investing is still very much alive and kicking. Companies that kept their expenses checked, while increasing profits have been the best investment for long term.
One of the best examples of one such company is 3M india. In the past 5 years, the revenue of 3M India has seen a growth of 52%, while the expenses have increased by 35% during the same period. As a result, company has seen a profit growth of 392% in the past 5 years.
Similarly, HUL, a leading FMCG company has seen a revenue growth of 22.5% in the past 5 years while the expenses increased by 16%, resulting in 35% growth in profits.
These are just few examples just to demonstrate that long term investing is still equally relevant as it was during Benjamin Graham’s era. If an investor thoroughly study the company fundamentals, long term investing could be a very profitable investment.
If you find this too complicated, simply pick any index fund or ETF, and you don’t have to worry about anything. An index ETF bought back in the year 2002 would have multiplied your money by 11 times.
Long term investing will never go out of date, as its theory is based on the financial performance of business. As long as businesses do well, it is always beneficial to keep holding those stocks.There are many examples of stock that have done well for many years, making money for their investors such as MRF Page Industries, Nestle India, Colgate, Procter and Gamble, Hindustan Unilever and many more.
As far as disruption by technology is concerned, there are pockets of businesses that are still unaffected by the technological advances as Warren Buffett once said, “I look at businesses that have strong economic moat around them, and are largely unaffected by the technology. I like the business of Wrigley’s chewing gum as technology cannot change which gum you chew, and it cannot change how you chew it.”
Finding such a business may be a task but with in depth analysis of both financials and study of business models, you will definitely succeed.