Nothing lasts forever!
This is a question in every long term investor’s mind. There is a great stock which I am currently holding and it has been performing very well. Now as a long term investor, I want to hold the stock for as long as possible to compound my wealth. So should I hold the stock forever?
Don’t know how to pick a good stock? Visit – How to choose your first Stock?
Or will there come a time where I need to sell my stock? The answer to that question is pretty simple – You can keep on holding the stock as long as the company performs well! The company might perform well for the next 50 years or it may not perform well after just a couple of years. I know this sounds very confusing so I will break it down into simpler terms.
Is TCS a good stock? Most of you will say yes and I agree.
Has it created wealth over a long term? The answer is again yes.
Can you buy it today and hold it for the next one year? The answer is probably yes.
But can you buy it today and hold it forever? The answer is NO!
It might seem very counter-intuitive the first time. Why can I hold a good stock for the next one year but not forever? That’s because nobody has seen the future! Even a great company with a great track record which is performing well and giving great returns to its shareholders might not do that well in the future.
Does anyone remembers Kodak cameras? They were a great hit in India in the late 90s and early 2000s. Everyone would take their Kodak cameras on their vacations and click pictures. All of this happened before digital cameras and mobile phone cameras were a thing. Now do you see anyone using Kodak cameras nowadays?
This is the exact reason why you should not hold a stock forever. If a long term investor would have made up his/her mind that Kodak is the best company in the world & I am going to hold the stock forever, then instead of becoming a Crorepati they would have become a Roadpati! The world around us changed and the company was unable to adapt which lead to the company losing market share. The company kept on losing customers and currently is not nearly as famous as it used to be.
Seems like a one off example? You all must remember Nokia mobile phones in the past. Everyone in India had Nokia phones and they were considered to be one of the best companies. See where they are today! There are many such examples of companies who were unable to keep their leader position in the market and led to an erosion of investor’s capital.
So what can a long term investor do about it? The first thing is to understand that holding a stock for a long time is a great strategy to compound your wealth. But holding a stock just for the sake of holding it is a foolish strategy. Always review your company’s performance. Notice I said company’s performance and not stock’s performance. It means that you need to check and analyze corporate results every quarter, not how much your stock has gone up or down. Even a great company such as TCS requires a constant gaze on the company’s performance. You may never know that even a ‘never sell’ company like TCS is unable to adapt to the changing world. It might become the next Kodak. Or it might keep on delivering good performances in their quarterly results for the next 50 years and you never end up selling the stock.
Only hold stocks for long term which are continuing to grow. It is possible that you find a gem of a company which keeps on performing well. In that case you will keep on holding the stock for a long time. Otherwise, it might be wise to sell! Don’t know when to sell a stock? Visit – When should I sell a stock?
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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