2X Growth potential for long-term investors
Mr. Deepak’s 10,000 shares of Maruti almost tripled to 29,000 shares even without any bonus shares or stock split, how?
Before we unveil Deepak’s super success story, we would like to share with you the tale of Mr. Abid, a so-called seasoned investor.
Abid bought 10,000 shares of Maruti for Rs. 16 lakhs in 2003. He was of the belief that a long-term investment in a great company holds tremendous potential for earning huge returns. So he invested his money and forgot about it. 16 years on and his investment has already given him a dividend of over 35 lakhs. He has already recovered twice of his initial investment just by way of dividends. If Abid sells his Maruti stocks today, he will get a tax free whooping cash flow of over Rs 7 crores.
Abid’s belief in the power of holding stocks for a long period of time isn’t wrong after all. While many of us might have held shares of Maruti at some point, most of us would have sold them for small profits. That’s the mistake most investors make: Harvest the crop too early and feed the weeds.
All of us wish that we become Abid someday. Even Abid thought that he was an unparalleled genius before he got to know Deepak. Like Abid, Deepak too believed in long-term and blue-chip investments, but made multiple times greater returns than Abid.
Let’s have a read through Deepak’s tale now. Just like Abid did, Deepak also invested 10,000 shares in Maruti in 2003 from a long-term stand. So how did he manage to gain more than Abid? Deepak kept actively trading his holdings: selling at higher rates and then again buying more shares of Maruti at a lower price. On an average, his total units of Maruti increased by about 1.5% every month (after setting apart some money to cover short term capital gain taxes and brokerages). Small gains over a long period can make a world of difference to one’s portfolio, and the current status of Deepak’s holdings in Maruti is a splendid example of the same. Today, while Abid holds the same 10,000 shares he bought in 2003, Deepak holds 29,000 of them: 19,000 more than what he started off with. The value of Deepak’s holdings has appreciated 13000% vs just 4500% for Abid in 16 years.
The question that now surfaces is whether there really exist ample opportunities to make gains from re-trading one’s holdings? Let’s look at the statistics of Maruti to find some answers. The average monthly opening to high price variance of Maruti is 8.3%. Deepak, putting his best efforts, managed an average monthly trading profit of 2% (earmarked 0.5% for capital gain taxes and other costs), and re-invested the balance in shares of Maruti. Technically, Deepak was able to grab 1 out of 4 opportunities all along.
The final outcome: Rs 16 lakh of investments made in 2003 in Maruti is valued today at 7 crores for Abid and at 20 crores for Deepak.
Let’s dwell deeper. What if the stock wasn’t that of Maruti? How would other blue-chip shares have performed for Abid and Deepak?
We have tabulated below the details of 16 stocks. In order for you to have a better understanding of the table, here is an explanation of the parameters used:
Average monthly trading profit % - Potential: This is the simple average of the difference between the calendar month highs and calendar month openings for 203 months (Jan 2003 to Nov 2019). The only exception is TCS for which the average of 184 months (Aug 2004 to Nov 2019) has been considered.
Average monthly trading profit % - Realised: It is impractical to grab 100% of the opportunities that present themselves before us over any period of time. In reality, it is considered astute if one can grab around 20% of them. The percentages mentioned below indicate what Deepak could realise following MFSL’s proprietary tools & strategies.
We have provisioned for sums payable for short term capital gains, and brokerage / advisory services, and the balance gains are reinvested in the same stocks.
‘increase in holdings %’ column shows Deepak’s increase (from initial investments) in current holdings expressed in percentage.
‘Total returns’ is for the period Jan 2003 to Nov 2019. In the case of Abid, he did not sell & buy. Abid’s gain is just the result of an increase in the market value of his original investments. ‘Total returns’ of Deepak are higher because of additional trading profits & reinvestment's.
Circa 2035. We see so many Abid's and Deepak's around everyday. Who among the two do you desire to be? Expertise & foresight to select great performing companies, patience to hold on, and the acumen to grab opportunities are some of the vital traits that set winners apart.
MFSL, offering Portfolio Management Services since 1999, has given a five-year average annual return (after all expenses) of 16.36%.
Disclaimer: Investments in stocks are subject to market risks. Past performance does not guarantee future returns.