“Buy and Hold” a quote that we hear all the time in investing parlance. The gist is that once you buy a quality business all you have to do is sit tight and ride the journey. Post-hoc when we examine the historical price movement of quality businesses they do trend upwards. Below is the stock price of TCS (the Indian IT behemoth) since its IPO;
Although the trend is upwards, it is not a smooth journey with several bumps in the way. I was got curious about the bumps during the ‘holding’ period of ‘buy and hold’.
A few liberties that I have exercised after all why let perfect be the enemy of good!
- I defined bumps as 'number of months the price went below the buying price'.
- The start period of the analysis is May'12 because that's when I graduated :)
- The end period is May'19 as I did not want to include skew due to the COVID lows and then recovery post Mar'20 decline
- I have assumed that the stock purchase is always at the monthly high price(FOMO maybe?)
- The investor is reminded by a pesky app/friend/broker/un-well wisher whenever the price hits a monthly low(maybe they are blessed with astrological powers to always know the monthly lows)
- For the technically curios, the price will be higher than the current price because I have adjusted for the 1/2 stock slit on May'2018
Below is a chart that shows if you bought at the monthly highs during a particular month, how many subsequent months was the stock price below your buying price.
This is one crazy bumpy ride! On average you have 10-15 months when the price goes below the buying price and if you had bought during the July'14 highs you would have experienced ~40 months where the price was below your buying price! Imagine having to endure the continuous underperformance combined with the barrage of news/(mis)information leading to either constantly questioning your hypothesis or be bemused(frustrated) with the market. Most importantly, if this can happen to you while owning TCS, what excruciating experiences you will have to weather for the other businesses.
So, next time when someone says ‘If you would have bought ABC at XYZ time you would have made WTF money’, all you need to do is smile and say ‘It is Harder than it Looks :) '