What would you do..?
…if the stock you purchased is up more than 30,000% from your purchase price?
A common and a sensible reaction would be to sell it immediately & celebrate. If I would have been in your place, even my first reaction would have been the same. And more so if this appreciation had taken place over a very short period of time.
But this particular one took almost 25 – 30 years.
One of my relatives called me up last night for a general chit-chat. Since he is into long term investing, or rather passive & lazy kind of investing, we generally end up talking about stocks much more than anything else. And this time was no different.
He told me that since markets had run up so much due to election-induced-euphoria, many in his friend circle were asking him to sell this ‘mega-multibagger’ now. As mentioned above, he was referring to the shares of HUL which were a part of his portfolio. Adjusting for various bonuses, splits and dividend re-investments in last few decades, his average cost per share worked out to be less than Rs 2.
And the stock is currently trading at around Rs 580!
And as mentioned in the title of this post, this amounts to a un-booked paper profit of more than 30,000%
Now the question is, why isn’t he selling his shares? That to after a rise of more than 30,000%!!
In 2013-14, HUL paid/announced a dividend of Rs 13 per share.
So what does this information have to do with the decision to sell (or not) a stock which is already up more than 30,000%?
This means that my relative is earning a monstrous dividend yield of 650% per year, i.e yield-on-cost. Yield-On-Cost is the dividend yield of a stock on its purchase price.
|Sometimes, its the only button you need on your Wealth Keyboard
For a stock having an effective purchase price of Rs 2, a dividend of Rs 13 every year means a yield of 650%. And since HUL generally pays dividends which increase with time, it is highly probable that this yield-on-cost will continue increasing in future too.
Now where else can you find an investment, which pays 650% every year?
And that is the reason my relative is not selling his shares. The logic which he gives is an extension of previous statement. If he sells his shares of HUL, it would be impossible for him to find an asset class which would provide him with such phenomenal annual returns.
|Comparison of Annual Returns by various assets
** HUL in this particular case
And this makes a lot of sense.
Though I call myself to be a long term investor, I still think that it is really, really tough to buy stocks and keep them for more than 25-30 years. Really, I am proud to be a relative of this person. 🙂
You can read my article on the concept of Yield-On-Cost in world famous value investing website Old School Value here.