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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Creating wealth by doing nothing

Posted by Muthu on January 28, 2017

Recently I shared my stock investment strategy in Twitter.

1) Buy quality companies

2) Expect to hold for 10+ years

3) Try not to overpay

4) Keep track

5) Sell rarely

I’ve 10 stocks in my stock portfolio, out of which 7 are quality companies, 2 are companies owned by efficient capital allocators and one is a bet on increasing of a white good consumption over next one decade.

Except with an investor group I belong to, I don’t discuss my stock portfolio with anyone. I’m not a RIA to advice others on stocks. Something or other would keep happening to the companies I own on a regular basis. If in public domain, I’ve to keep answering queries on such events. I may perform well in a year and even may under perform for many years. I need to keep answering for the same. People would start asking whether a company is a good buy, at what price and so on. I neither have analytical rigour nor inclination to answer such questions. These are the reasons why I don’t discuss about the stocks I own.

Still I want to share few insights through this blog. I would suggest reading a book called ‘Unusual Billionaires’ by Saurabh Mukerjea. He talks about Coffee Can Portfolio approach wherein you buy companies based on parameters of ROCE (Return on Capital Employed) and revenue growth, which are consistent over a 10 year period.

Applying the yardstick for previous 10 years, each year some companies are chosen. He takes six ten year periods. This means the portfolio keeps changing and rebalanced every year. Only companies fulfilling the quality parameters are brought in. The ones which no longer fits the criteria are sold.

After careful choosing and periodical rebalancing, the return of the portfolio is 18.7% per annum.

Here comes the surprise. Instead of rebalancing regularly on quality parameters, if an investor has just sticked on to the original portfolio (which was also selected on the same quality parameters), the return of portfolio is 24.5%.

Even if you own quality companies, non churning provides a much superior return in the long run then periodical churning.

The key to winning in equity, after choosing quality companies or good funds is to keep doing nothing.

Saurabh gives an example of the stock Lupin. During the 12 year period, from 2004 to 2015, Lupin price did not move for a 6 year period. They are January 2004 to March 2008, December 2010 to March 2013 and April 2015 to October 2015. But it did so well in the balance period, that 12 year annualised return was a whopping 33%. How many of us would have held on to the stock when for 4 years (from 2004 to 2008) it did not move at all?

Whether it is mutual funds or shares, as far as equity is concerned, we need to get used to extreme inactivity. Returns are and would continue to be lumpy.

Saurabh Mukerjea gives his yardstick for choosing quality companies in the above book.

Though I don’t strictly define quality, I would suggest reading the following book “Quality Investing: Owning the best companies for the long term” by Torkell Eide and Lawrence Cunningham. This would give you an understanding of what quality means. Also read about the QGLP (Quality, Growth, Longevity and Price) frame work of Motilal Oswal.

In fact, you can check your stock portfolio here and see whether your companies fit the QGLP framework. You can also compare your performance with PMS and mutual fund schemes of Motilal Oswal.

Incidentally, I found that all the 7 companies I own and label as quality companies fits the QGLP framework as per the above website.

As far as owning companies of efficient capital allocators are concerned, please read the book ‘The Outsiders’ by William Thorndike.

I’ve suggested 3 good books for you today. Please buy and read them over next few months. Whether you invest directly in stocks or not, your conviction towards equity investing would go up.

Also do not forget that huge wealth in equity is created only after very many years of inactivity.

One Response to “Creating wealth by doing nothing”

  1. R KANTHAVEL said

    Nice article. But going with Direct Stocks reward more than thru MF. w can invest whenever the stock/index goes bottom that will create wealth.
    As I am understand that MF’s have some cap on individual stock

    your thoughts needed

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