Investment strategy 6: The Buy, Hold, Never Sell Strategy

Lethargy bordering on sloth remains the cornerstone of our investment style.- Warren Buffet.

Being masterly inactive when it comes to investing can help you outperform most people. And it does not need some special skill, knowledge or ability in choosing the best stocks, choosing the best time to buy and sell and choosing when to switch asset classes.

The way to do this is as follows:

Buy equal amounts of all the Sensex stocks( eg. invest Rs. 10,000 in each Sensex stock). Then forget about it. No buying and selling. No re-balancing. No transaction costs. No taxes to pay. No buy targets. No sell targets.Let nature take its own course.After a long period( say 10 years or so), you will find that you would have outperformed the Sensex.

Yes , it is this simple. It is not easy. That is because of human nature. Fear and greed. Control yourself and the process becomes easy.

The Sensex stocks usually are the bluest of blue chips and hence unlikely to go bankrupt. Even if one or two(like Satyam computers) go under, you will still end up beating the market. It is like buying a house. If you buy a house and keep it for 10 years you will profit much at the end of 10-20 years in most cases.

It is even better than an index fund. An index like the Sensex is actively managed. It adds new stocks and removes stocks at regular intervals. All of these manuevers affect performance. You just buy and hold.

This is buy and hold carried to the extreme. And it works.

This is not a new idea. It has been done in the US- ING Corporate Leaders. This has outperformed the market over long periods of time since 1935.

To prove my point, I have tracked the returns between the strategy described above and the Sensex over the period 2002-2012. It buys equal amounts of all the Sensex stocks as of 01/01/2002 and we track the returns till 31/12/2012. Yes, it includes buying stocks like Satyam, HPCL and MTNL which were part of the Sensex then.

  • The CAGR for the strategy between 2002-2012 is 19.82%. Rs 100 becomes Rs. 730.84
  • The CAGR for the Sensex between 2002-2012 is 17.61%. Rs 100 becomes Rs. 595.51

You might say that this not a lot of difference. But you have 23% more money with no work at all. Is this not great?

There are many other ways you can carry out this or similar strategies( like using the Nifty, like using a broader index, including stocks that pay dividends only, etc).All of them will most likely beat the market over the long run. You worst enemy in carrying out such a strategy is likely to be yourself.

(Find the spreadsheet of the strategy described in the post here)