We all know a neighbour or relative of ours that invested in Wipro in 1980 when the company ‘diversified’ into Information Technology (IT); or in Infosys IPO in 1993. They have never sold a single share since, and have compounded their wealth at over 30% CAGR. This is an exception and not a norm.
If one were to look at the S&P 500 composition from 1st Jan 1999 till FY23 end, of the 500 companies present in the index back then, 258 (a whopping 52%) have gone bankrupt, delisted, or acquired at a discount. Another 27 companies have given a negative return since 1999. If you were to employ buy and hold as a strategy for the entire equity universe, only 131 companies (26%) beat the index.
Buy and Hold works for equity as an asset class in a growing economy with a democratic regime which is evidenced by the S&P 500’s outperformance vs. more than 70% of its constituents; not for individual companies.
Long term compounders are created by the companies constantly delivering growth beyond analyst expectations and are never known in advance. The ability of companies to sustain this positively surprising growth over longer time frames has reduced dramatically in the last six decades. The median age of a Fortune 500 company in the 1960s was over 80 years vs. less than 33 years today. The market cap weighted average, far lower than that.
There are three major factors that cause disruptions in business today that are unlike the past century.
First, technological advances in every field are swifter than ever before as the base infrastructure required for adoption has been around for a while. For example, if computers are installed prior to the onset of public internet, or data plans and internet available freely prior to the onset of a new social media platform- adoption will be faster.
This fast pace of technological disruption is also fueled by the second factor which is easy access of capital available to all disruptors. Raising public money from a venture capital firm, or HNI investors is no longer a challenge. This has enabled pre-revenue companies (perhaps mere research projects) to get funded and therefore take a shot of unseating incumbents in a sector.
The third factor that has shortened time at top is regulatory overhangs. From environmental concerns to increasingly protectionist measures, policy in democratic nations too is evolving at a far faster pace than before.
This impacts supply chains, acceptable manufacturing practices and in some cases availability of capital (as some funds/ banks now have an incremental ESG mandate to adhere to). Incumbents require stability in policy to continue to thrive. Thriving despite these changes in technology and regulations are an exception to the norm, not the norm itself.
We are not advocating a tactical approach alone to investing. But it is foolhardy to believe that buy and hold works for all individual companies. If you had bought and held on to the Pharma Index in 2015 (which was in vogue back in the day, being the sector of the then richest man of India) you would have just about broken even now. Eight years of almost zero returns.
Create an investing framework that works for your risk appetite and your intended reward goals. Marry your holdings to that framework but don’t marry yourself to your holdings. While your framework may keep evolving as you learn, it is your core framework that you must buy and hold, not individual equity positions.
Harini Dedhia, Portfolio Manager and Head of Research.
