Warren Buffett invested in Coca-Cola in 1988. That investment has grown at a compounded rate of near 68 percent per year, excluding dividends. And the legendary investor’s oft-quoted comment on this investment is telling – “When we own portions of outstanding businesses with outstanding managements, our favourite holding period is forever.”
Berkshire Hathaway continues to hold a near 9 percent stake in Coca-Cola 35 years after the purchase. So, should you just buy shares and sleep on them? Not at all. Not every stock will be a Coca-Cola. But if you invest in the right businesses, you have less to worry about short-term gyrations in the market and a lesser need to actively churn your portfolio without compromising on returns.
Invest in Research
Investing in stocks calls for investment of your time in researching the business you wish to invest in. You should understand the marketplace it operates in, the regulatory environment, the global and local risks, business’s key strengths and weaknesses and above all the quality of the management team and their commitment to the business.
Only once you have comfort on all the above aspects, should you move to the next stage of evaluating whether the business at that juncture and at the given valuations is worth investing in.
Governance is Paramount
The quality of people that run a business and the quality of the board that governs it are critical for an investor. Businesses are built by people and therefore the most important factor that you should consider while investing in a business is the quality of management.
It is not surprising, therefore, that stocks often react when there is a change at the helm. As the new incumbent can make all the difference to a company’s future.
In India, companies rated high on governance and management calibre tend to enjoy great investor confidence. It is no wonder that a Hindustan Unilever (HUL) or a Tata Group company commands a premium, therefore.
Size Doesn’t Matter
Whether a business is large or small does not matter. What matters is its growth potential. Often large businesses grow bigger and stronger while small ones can falter and lose their edge.
Also, large needs to be seen in context. What we in India may consider large may be very small from a global industry perspective and hence may offer high growth potential.
Demonstrated Compounding
We need not look overseas for compounding stories in stocks. There are several in India. From Asian Paints to Bajaj Finance to HDFC Bank to Infosys to Reliance Industries to TCS to Titan, there are many that have delivered significant compounded returns to investors. And for many such companies, there is no reason to expect they will not continue to do so.
And their ability to do so rests largely on the shoulders of those who manage these businesses. So, if you have confidence in the management of a business and are upbeat on its prospects, your best approach to compounding would be to just invest and wait, and wait, and wait.
Happy investing.
(Edited by : Priyanka Deshpande)
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