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The art of building wealth by holding on to great businesses

You must stick to the businesses that deliver growth without stretching the balance sheet and asking for more funds and where the quality of growth is exceptional.

October 31, 2021 / 07:35 AM IST
Representative image

Representative image

Devang Mehta, Head – Equity Advisory at Centrum Wealth

If you feel selling is the hard part of investing, and not buying, then holding on is harder. In a raging bull market, where every trader has a tale to tell on choosing the right stock and making obscene returns within a small span of time, you’re bound to let go your great businesses in a hunt for instant gratification.

When you talk or write on this natural phenomenon, it will invariably attract discussions and heated debates. To each, his own.

The art of holding great businesses has, however, helped investors build, preserve and multiply their wealth and achieve that much-needed financial independence.

But, despite the evidence in support of buy-and-hold investing, many investors find it difficult to be patient. This is often because the apprehension and uneasiness associated with a higher level of investment risk can make it tempting to over-trade. During periods of market volatility, a sensible buy-and-hold investment can quickly turn into an active trading strategy. This can mean that you end up buying and selling at just the wrong time.

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While the days of ‘ignorance is bliss’ seem to be over in this highly disruptive world, it is very important to recognise the qualities of a business, which you want to hold for the long term. Of course, being proactive and modifying your strategy from ‘Buy and Hold’ to ‘Buy, Monitor and Hold’ is more crucial now.

Finding companies that can grow at a sustainably high rate by using the rear-view mirror and the windshield to map the future prospects ensure that you build a portfolio of great businesses.

The broad parameters we use to select the businesses include the size of the opportunity, market share of the company, and its margin of safety. The process assures that you cherry-pick companies with pricing power, monopolistic or oligopolistic advantages, high ROE (return on equity), no or low debt with a potential to grow its market share, revenue, margins, profitability and hence market capitalisation across difficult cycles.

Businesses that can deliver growth without stretching the balance sheets and without asking for more capital and where the quality of growth is exceptional in terms of incremental returns on capital, they will increase the per-share value for shareholders over the long term. That probable growth in value is sometimes mispriced by markets even if the stock has appreciated a lot. Under those situations, it would be a mistake to sell. Valuation should not be the only criterion, though it has to be one of them.

Very few investors utilise the power to average on the way up in high quality businesses. If you have picked the right business, which will be worth several times present market valuation in a few years, don’t hesitate to buy its shares, just because they are quoting at an all-time high market prices.

I can provide examples of companies like Nestle, Britannia, HDFC Bank, Kotak Mahindra Bank, HDFC Limited, Bajaj Finance, Titan, Havells, Pidilite Industries, Asian Paints, Berger Paints, Infosys, TCS, Aarti Industries, Abbott India, Marico and many more which have been compounders to the tune of 20 to 40 percent (read CAGR) for the last 15 to 20 years. These are simple examples and should not be understood as recommendations.

Contrary to this, if the business is delivering far poor performance consistently than what you had foreseen earlier, and that performance is likely to continue because the moat is impaired, you should be ready to exit and switch to a more meritorious business. A flexible and an open-minded approach to accept the mistakes made will warrant that one doesn’t get attached to the business.

“Games are won by players who focus on the field, not the ones looking at the scoreboard,” Warren Buffett said. Long-term investors should focus on what matters, business growth not price swings, except for extremes. It is crucial to stay throughout market cycles, as even missing just a few of the best days can have a major impact on your long-term returns.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

 



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Devang Mehta is the Head – Equity Advisory at Centrum Wealth Management.
first published: Oct 30, 2021 03:51 pm
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