…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.
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Two points… 1. In the graph, for HUL, you mentioned the Yeild on cost. For all others, you mentioned yeild if we invest now. I mean, my point is, let us say I invested Rs.1lakh in an FD some 10yrs back, now it became some 25lakhs. Now, my yeild on cost is not 8%, but 8*(25/10) = 20%.
2. I agree that HUL has given him great returns. Just keeping the name aside for the time-being. Let us say one company has given me great returns, but, if I remain invested in the firm without bothering about its current performance and the way things look ahead for it, I would probably consider that as anchoring bias of the investor.
Dear Stable Investor, I just wanted to know how the Private Banks fared against the PSU Banks in the same period.
10 years + can't say I've had a bad run …
i believe the amount invested before 25-30 yrs was significant enough to celebrate the 30000% return. Anyways the spirit of long term is truly preserved by your relative. Hatsoff for this.
If i were your relative and be on same position.I also wont have sold it.Even though i might have better opportunities to earn.
Simple reason for me would be i am no geek like warren buffet knowing every move of the market or business.
Plus suppose one say he sells the share and buy say TCS or Say HDFC bank.In a year or two he will again check their price.Obviously he is above 50 and now will compare the price with HUL thinking.I got those share at 2 and now i tough have 10000 of these but appreciation doesn't look big even though price might have appreciated.
I believe in simple funda.If one buy good stock ,one must get at-least buy price or with profit reduce buy price.And rest forget .And with that buy price money try to look for another opportunities.As investing in stock doesnt be your main aim to earn but you should be ready that if all your investment turns zero you must have little acidity but no heart breaks.
I had bought Apollo Tyres at 95 ..I exited some (40%)and now i hold some shares with buy price of 47.I wont sell those unless the stock appreciate in share price or company stays positive in balance sheet without debts.Ill pass to next generation surely no doubt i dont know whether its some great company.But you never know one day it might be quoting like MRF or Eicher Motors.
And in India one thing favors equity is not long term capital gain tax on equities and also no wealth tax.Plus also dividend are tax free .
your thoughts Venky
1) The graph shows 650% annual return (on adjusted price) against annual returns given
by other assets. It is to show that if one liquidates the stock position today, what are the possible options one has to park the money. If one sells the stocks and reinvests in HUL @ 580, the yield would ofcourse become 2% to 3%. But here, cost is historical and adjusted and not Rs 580.
And Rs 1 lac turning to Rs 25 lacs in 10 year is something close to 38%-40% CAGR. I am
not sure if I understand this point of yours.
2) Point taken. One should always keep an eye on the business behind the stock, no matter how great the returns are. There can always be a potential Kodak (or Nokia) sitting in one’s portfolio. 🙂
3) It might not be a text book concept, but for dividend investing, it does make a lot of sense and helps control an investor’s urge to sell stocks of good businesses when they rise too much.
Well said Ani. Sometimes the percentage returns tell a different story than the ones told by absolute numbers. 🙂
But yes, my relative's chunk of HUL stocks was decent enough 🙂
Simple and Powerful thoughts Sohil.
Your words 'I am no geek like warren buffet knowing every move of the market or business' are very powerful indeed. One should never underestimate the supremacy of markets. Its better to stick with 'real' businesses purchased at decent prices and using occasional profits/dividends to purchase more shares of such sensible businesses. That is all that is required in the long run,
I took 3 notable names among private Banks (Axis, ICICI, Yes) and checked the returns in last 3 and 6 months. And two big PSU banks PNB and BOB seem to have done a better job than their private counter parts.
But having said that, one should note that these PSU banks are running up because of the Modi effect these days 🙂
Dear stable investor,
I just wanted to know the concept of dividend reinvesting.
If someone is holding a 20 % cagr growth stock with 2% div.yield on price,and if he continue to reinvest the dividend on same stock if he do it for next 10 years then what should be the effective cagr after 10 years…
Your thoughts please sir….
one point if suppose he sells the stock @580 and if he had put in FD@9% then CAGR returns for each share will be Rs 52 and there is a risk of capital depreciation if continued in stock market….If taxes are considered it may around @45 although it is higher than the dividend….Am i missing something?
30K% over 30 yrs = 22% IRR. You mentioned this already includes dividend re-investments. So there was no need to make the point separately. Its a great investment anyway.
Hi Shanid. The CAGR for the scenario provided by you would be around 22.4%.
I tried using the below logic to arrive at that number.
Its another way of looking at the same
thing. In this case, Rs 52 is earned as interest on Rs 580 (coming from sale of
share effectively purchased at Rs 2). But after sale, there is no share held by
the investor. The capital gain is already locked. And future potential rise in
share prices is unaccounted for. But yes, your approach is a good way of providing
counter argument to this person’s thought process of sticking to his stocks
even after gaining 30K% returns.
That is a rather stupid way of calculating the opportunity cost of your capital. In this case, the company in question might be a great buy on all checklists but ur relatives reasons to not sell has nothing to do with the checklist and hence Stupid in my view. Invert analyses and vicarious experience will help your relative to finally open his eyes. Just show him the graph of UNITECH or INFY (from 2000 onwards) or any fortune 500 company 40 years ago, only a handful survived. Survivor ship bias fools patsies to believe in buy & hold magic gimmickry.