A few days ago, I was reading an analysis report on Kotak Mahindra Bank (KMB) by Jana Vembu. It explains how KMB emerged as a survivor by providing its banking services to consumers, corporates and commercial businesses. As per the report, INR1 invested with Mr. Uday Kotak (Managing Director, KMB) in 1985 would be worth INR2 Lakh today.
Let me throw in some color. With lots of ups and downs in 33 years, INR1L invested in Kotak Mahindra Bank (KMB) would be worth INR2,000cr. That’s an astonishing rise of 1,99,99,900%. Amazing. Isn’t it? Who doesn’t love to own such companies? And yet, a majority of us fail to grasp such exemplary returns.
Because owning such companies can turn out to be a real nightmare during the holding period. The fear that erupts inside us after observing a decline in stock price often outpowers the conviction with which we had bought the stock in the very first place. This compels us to sell the stock even if its primary business is fundamentally strong. In fact, under panic, we fail to analyze the capability of the management that works day and night to make it.
The Pain of Holding a Stock
In a span of 33 long years, KMB compounded at a CAGR of 45%. But this didn’t happen every year. The high returns did come at a cost. The kind of volatility that the company and its investors had to go through is depicted in the chart below.
During the 2008-Recession, it lost its value by 84.9%. Post-recession, it took more than 5 years to reclaim its 2008 peak. Not only this. At least on 6 occasions, the stock fell down by more than 50%. Around 73% of the time, during its journey, it stayed below its previous all-time high open price. Besides, it tasted the aftermaths of Kargil War, Asian Currency Criss, the Dot-Com Bubble Crash, 2008-Recession and other global key events which took the investors through a rather tumultuous ride.
Despite all these volatility, I wish I had owned the shares of KMB. But why? Because it’s headed by one of those exceptional leaders, Mr. Uday Kotak, who has built the Kotak business worth billions of dollars from scratch - no mean feat.
The truth is that all great companies go through such adverse stages. The pain of holding a stock lies in the fact that it can face a drawdown in extreme double digits. That too for a long period of time. Sometimes, it may never even recover within a stipulated time frame. The other times, it may test your patience by staying stagnant. Be it the adhesive big player Pidilite or biscuit maker Britannia. They all have fallen down in the past.
On the other hand, the ones who have the stomach to ride such roller-coaster rides throughout the awful phases make the real money. All they need to do is ignore the short-term fluctuations in the stock prices and focus on the long-term business prospects instead. With a growing business and its earnings, the stock price eventually starts resonating.
Having said that, it reminds me of one of the quotes by Prof. Sanjay Bakshi of MDI, Gurgaon:
If you end up owning a fantastic business, then plan to hold it for a long time. And prepare yourself for a roller coaster ride. If you have chosen the right business to own, the ride will be worth it in the end.
~ Mr. Sanjay Bakshi, Professor at MDI, Gurgaon
While writing this post, I happened to remember an old BBC interview on Charlie Munger (Vice-Chairman, Berkshire Hathaway). On 26th October 2009, he was asked, “So how much does Charlie worry when Berkshire’s common stock declines?“
Zero. This is the third time that Warren and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%.
Further, he added:
I think it’s in the nature of long-term shareholding of the normal vicissitudes, in worldly outcomes, and in markets that the long-term holder has his quoted value of his stocks go down by say 50%.
Then, later in the interview, he said:
In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.
That’s the pain of holding a stock. It can wipe off the gains that may go beyond our imagination!!!
Originally Published in RichifyMeClub