Mailbag: I am 45 years old & want to accumulate shares of good companies for next 20 years

A reader aged 45 had the following query. Though he asked the question on Stable Investor’s Facebook page, I thought it would be a good idea to share it with loyal website readers to know their views.
So here is his question:
“I am 45 years old and wish to invest in equities for long term. My goal is to create a corpus, which I may use when I’ll cross 65. Hence in which Indian companies should I invest? I plan to buy stocks of the chosen companies regularly in small quantities in “buy-and-forget” mode. I don’t want to be bothered about daily price fluctuations or viability of company’s business. Please recommend a few companies which you think would keep performing well for years to come. I assume that at whatever price I buy these stocks, I would eventually have significant capital appreciation over the next 20 years.”
Now this is what I think:
I am assuming that you are adequately insured and have sufficient money in your emergency funds. With this assumption, I would say that it is always advisable that one should invest in multiple asset classes, so that there is no concentration risk. I am assuming that since you plan to invest in the so-call-risky asset class, you already have decent positions in less risky ones like PPF, PFs, NSCs, bonds, FDs & RDs etc.
Now Buy and Forget kind of investing requires that you pick companies which you are sure are going to survive for next 20 years. These are companies which essentially, have a greater ability to suffer than other listed companies.
Once you have taken care of survival, you need to shortlist those which have a good probability of flourishing in next 20 years. Just these 2 filters would reduce the list of probable companies to less than 10-15. And that in itself is a pretty manageable number.
But having said that, I would digress a little from this topic of direct equity investment. You can, or rather should consider routing a substantial part of your planned monthly investments through index funds. You might argue that investing in index funds would eliminate the probability of picking up multibaggers, even when considering a 20 year time frame. That’s correct. But this would also eliminate the possibility of ending up with stocks of companies which might be very close to being shut down at end of 18-19 years of your stock accumulation period.
Now no one would want to accumulate shares of a company for 19 years, only to find that when he requires that money in 20thyear, share prices have crashed down and business is about to close. 🙁 So, I would suggest that you should give index fund investing a serious thought.
Sometime back, I had suggested a similar approach to two young readers who also intended to invest for next few decades! You can read those discussions here and hereBut if you still want to go ahead with a Direct-Equity-SIP sort of a program where you buy few shares of companies every month for next 20 years, you should stick to companies which pass the following criteria –
Provide products and services which would have increased demand in years to come and are ideally placed to benefit from India’s demographic profile over next 20 years.
To meet this demand, these companies should depend as little as possible on debt and should be able to fund their expansion through cash flows itself.
The companies should be run by trustworthy and proven management. You don’t want to handover your hard earned money to companies which are not run by people whom you would personally not like to interact with. Isn’t it?
Personally speaking, dividend paying companies ring a bell for me. But you can choose not to consider this criteria.
So once you have shortlisted companies according to these criterias, you would have very few companies which you would like to invest for next 20 years.
One such company which comes to mind is ITC. You can create your own list of such companies.
It is always better to have a framework (structure) before you go ahead picking specific stocks. Hopefully, this post will help you in coming up with a correct framework to pick stocks worthy of long term investments.
This is what I feel should be done by the reader. What do you all think?

Passing thoughts…

It’s been a while since we last posted. This gap is because of some prior commitments and also because of laziness on our part. Nevertheless, we are back. But it seems that since beginning of this month, everything has started looking downhill. The Rupee is celebrating its senior citizenship. Markets are grinding lower and lower. FIIs are pulling out money from the markets. Your portfolio is bleeding. Many short term traders (you know) are making a killing in the market. 🙂

So, what should you do in such times?
The markets are slowly (but definitely) moving below their long term average valuations. So, should we consider these as signs of a coming crisis? If you listen to some of the experts, they are of view that one should not be surprised to see 20% correction from these levels. We don’t know whether these experts are correct or not. But the question which concerns us is what are we doing right now? Are we selling our stocks and booking loses? Or are we preparing ourselves for the Crisis? There is no question about whether a CRISIS will come or not. It’s only a matter of time. Sooner or later, a fall is bound to come [pardon our speculative statements]. So when the CRISIS actually comes, would you have the COURAGE? Courage to go out and buy when everyone else is selling? Now, courage comes from knowing what to do when situation gets worse. That is, you should be prepared for the crisis. It is only when you are adequately prepared, will you be able to take a rational decision in hard times.
But Courage alone (in Crisis)is not enough. You need to have the firepower to take advantage of the situation. Someone has rightly said –“Never waste a good crisis.” So in terms of stock markets, what is this firepower? It’s obvious… its CASH. You have CRISIS (when great companies are available at really cheap prices). You have COURAGE (as you are prepared and know the stocks which you want to buy in market crash). The only missing component here is CASH. This is the vital component of 3 Cs which allows you to purchase these great businesses at really cheap prices.
These are just few random thoughts we had during these trying time. So what are you doing? Selling, Buying or hoarding cash for the anticipated crash?