Overview:
The term “Investing” is one of the most misused words I have ever come across. Investing has many contexts in businesses, savings, stock markets, etc. People also invest money in real estate when the rates are cheaper and benefit by selling the plot or house at higher premiums.
Generally, Investing means allocating resources like time, effort, and money, with the expectations of generating income or other future benefits. For example, you can invest your time reading books on stock market investments, gain knowledge, and make prosperous investments.
Regarding investing in stock markets, people often confuse investing with trading and speculating. Nonetheless, I made a stupid options-trade that wiped out all my gains since last month. To make it clear for you, I am a trader as well, so it happens while trading and speculating in markets. You should only risk the amount you can, and that’s what I did. You can find my article on Investing Vs Speculation.
Long Term Investing:
In India, the Long Term Capital Gains or LTCG tax of 0% per profit is applicable only if the stocks or other assets are held for a minimum of one year and if the profit made is less than one lakh. For the capital gains more than one lakh, the LTCG will be around 10% per profit. So technically speaking, in India, if the shares are held for more than a year, it comes under a Long Term Investment.
Conversely, if the stocks are sold in less than one year, then it is taxed under Short Term Capital Gains tax of 15% per gains. Some investors hold onto the stocks for decades. Legendary Warren Buffet bought Coca-Cola in 1988.
Usually, I don’t recommend the common public to trade or speculate in stock markets. They should only concentrate on investing in high-quality stocks, indices, and mutual funds at an appropriate price. Basically, Long Term Investing is putting your money on a stock with strong fundamentals and healthy financial statements and waiting for a considerable time, maybe for years.
I have already mentioned this concept in my previous articles. Recently, I got a question from one of my readers. It is like this “Investing in good stocks for a long time is okay, but how long we should hold that stock?”
It is really a good question. I have tried explaining this question in a very practical way so that even a layman investor can understand easily. For demonstration, I am comparing the stocks of two Large caps, ONGC and Reliance.
Comparison of ONGC and Reliance stocks:
ONGC is a Maha-Ratna company that belongs to the Government of India. It is the largest crude oil and natural gas company in India, contributing to about 75% of Indian domestic crude oil production. It is a high dividend-paying stock with a current yield of 6.57% per annum. You can find more about the company on its website.
So after witnessing the grandeur and monopoly of this great oil company, any new investor would like to invest in its stock for a long time, maybe forever like Buffet held Coca-Cola.
But the stock market is such a tricky place. If everything is that clear, the entire World’s population would flock to stock markets for making money. If all the good company stocks are well rewarded, then why the stock markets are so complicated?
Suppose a person had invested in ONGC stocks in May 2010, exactly ten years before. By now, in May 2020, he or she would have successfully lost more than 60% of their invested capital. Yeah! It’s right. ONGC was trading around ₹190/- in May 2010. Now, it’s trading at ₹76/-.
Do not panic from the above statement. The ONGC stock has reached ₹290/- in 2014 before starting to fall continuously ever since. If an investor had sold the shares then, he or she would have made a 50% profit in four years.
Reliance does not require any introduction. It is the largest company in India covering every sector ranging from Oil Exploration, Petrochemicals, Textiles, Retailing Services, Telecom Operations, Internet Provider, etc. With a market cap of over 9.68 lakh crore, it weighs more than 11.5% in the Nifty Index. For more information, you can visit the Reliance website
If a person had invested in Reliance stocks at 545/- in May 2010, he or she would have made ₹100/- into ₹265/- by now. It means 165% gain on the invested capital in ten years. Currently, Reliance stock is trading at ₹1435/-.
Why so much disparity?
First of all, the companies that increase the earnings continuously every year trade at high premiums. Nowadays, earnings and brand name decide the performance of the stocks in the capital markets.
ONGC is a Public Sector company belonging to the Indian Government. So the profit generated goes into the administration of the Indian population. According to the strict government rules, the ONGC had to pay more than 20% of its earnings as dividends to the shareholders. ONGC is stuck to only Oil Exploration and related businesses, which are highly capital intensive.
The profits of Oil companies are directly influenced by highly fluctuating world crude oil prices. As a result, there is no guarantee of consistently increasing earnings per year.
Reliance is the largest company in India, widely diversified into many sectors. With so many businesses, the chances of poor performance in the earnings are very rare. Remember, it requires exceptional administration to excel in a variety of businesses. With JIO on the rise, there seem to be no breaks for Reliance in the near term.
Since Reliance has diversified into various sectors, there is no dependence on any single sector entirely. But as of now, Reliance is dependent mostly on Oil Exploration and Refining. Embarking the Telecom and Internet services is the best strategy that worked perfectly for Reliance Industries.
Conclusion:
Long Term Investing does not mean sticking to stock for years irrespective of its price. It depends on the industry and business of the company beneath that stock. For ONGC, it took 4 years to reach the peak. The investor who expected the share to keep on increasing forever would have a grave mistake.
For Reliance, the stock stayed at a certain price for over 8 years before skyrocketing ever since 2017. An investor who believed and held onto Reliance stocks have made a fortune now.
Careful analysis of the stock at least once every quarter is necessary. You must be able to understand the business and basic financial reports of the companies you invest in.
If you are confused about holding or exiting a stock, follow this simple strategy. Suppose you had held onto a stock for more than 2 years or had made around 50% or more profit. If that share falls continuously more than 10%, it’s better to get out of that stock. In case, if you are confused, find an honest adviser or research analyst to advice you.
This completes the article on the tenure of Long Term Investing. Anyhow, I will start stock analysis reports and post them on the website only after June 2020. Since I am against investing in stock markets for new investors and the common public with no experience for the next six months. Because we get to find the real high-quality stocks based on their performance during this lockdown period.
Note:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID: shivakumar.lachapeta@valueinvesting.online.
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