What do we understand by the term long-term investing. It is about the best share to buy for long term and also the best long term stocks. Investing, by default, is for the long term and you assume a minimum holding period of 5 years or more. Like Warren Buffett said, “My holding period for stocks is forever.” There is a reason for this long term approach.
Most companies tend to discover their value only over a longer period of time. For example, Infosys was a profit making company for a long time, before it reached tipping point and built scale. That is when it became an attractive investment. Had you invested Rs10,000 in Wipro in 1980, the stock would be worth more than Rs300 crore today, even if you had done nothing with the stock.
Top performing long term stocks to watch in India 2023
How do we define a long term stock? Is it just about P/E? In fact, it is about consistent performance, consistent growth in top line and bottom line as well as some unique moats that the company has created over time. In reality, it is about the best share to buy for long term and the best long term stocks. Here are 6 such companies.
a) HDFC Bank (CMP Rs1,610.35 and Market Cap at Rs898,534 crore). The stock of HDFC Bank has shown consistent growth of over 15% in its business with solid top net interest margins of around 4% quarter after quarter. The company is likely to undergo a big change post the merger with HDFC.
b) TCS Ltd (CMP Rs3,199.25 and Market Cap at Rs11,70,622 crore). The stock of TCS has always attracted premium valuations but that is because it has sustained operating margins in the region of 25% even in tough market conditions. TCS was also the first IT forayer into the digital space.
c) Reliance Industries (CMP Rs2,331.75 and Market Cap at Rs15,77,566 crore). The stock of Reliance has got a recent boost from the demerger of Jio Financial Services. This is likely to set a template for later divestments of the retail business and also the Jio digital business into separate listed entities. That is likely to boost SOTP valuations.
d) NTPC Ltd (CMP Rs177.70 and Market Cap at Rs172,310 crore). The stock of NTPC has recently found favour after its huge investments and bets on the renewable power space. It has also sorted out its coal supply issues and is emerging as a high dividend yield power bet for the future.
e) Avenue Supermarts Ltd (CMP Rs3,555.50 and Market Cap at Rs230,316 crore). The stock of D-Mart has been an expensive retail play, but its policy of low cost and high volumes with a very micro customer focused approach has worked. Since its IPO in 2017, D-Mart has been a multi-bagger with a lot more to go.
f) Hindustan Aeronautics Ltd (CMP Rs2,711.85 and Market Cap at Rs90,681 crore). The stock of HAL has already doubled in this year and has been a big beneficiary of the government thrust on localized manufacturing of defence equipment and focus on defence exports. It has an overflowing order book.
The common string is that they all have a story for the long term. These are the best share to buy for long term and the best long term stocks.
Building a diversified portfolio with best long term stocks
How do you go about building a diversified portfolio of best long term stocks. You have seen the stock picks in the previous para, now it is time to look at how to build this into a diversified portfolio of stocks. Here are some key steps to follow.
• The first step is to diversify among asset classes. For instance, you must combine equities, debt, hybrid asset classes, ETFs, index funds, gold, property, foreign assets as part of your portfolio and equity is just one of them.
• The second step is to diversify within equity by Sectors or industry groups. Your portfolio needs a judicious mix across sectors like capital goods, consumer goods, pharma, Information technology etc. Each of these sectors has unique features and these stocks do not move in tandem. For example, cement and steel benefit from the construction cycle while banks and financial stocks benefit when the rates are rising.
• The third step is to diversify within equity by themes. Themes are slightly different from sectors and are broader. For instance, NBFCs, realty and autos are impacted by higher rates, so rate sensitivity is a common theme for them. Similarly, rural demand as a theme, benefits from higher rural incomes and benefits sectors like tractors, two wheelers, FMCG products, agrochemicals, fertilizers etc.
• Finally, you also diversify by companies. Even within the same industry, your portfolio must have a mix of companies with higher operating margins, companies with high asset turnover ratios and companies with low leverage. You also must combine growth stocks with dividend yield stocks to mix growth with stability.
These are the basic steps to building a diversified portfolio of stocks. They entail the best share to buy for long term and identifying the best long term stocks.
How to evaluate the market and industry trends for long term stocks
There are no hard and fast rules, but you can use some pointers. Look for companies with an established track record. That way you may miss some new age companies, but that is ok. Also, focus on profits. Eyeballs and footfalls are not enough to sustain a business. Look for companies with positive operating cash flows and healthy ROE and ROCE.
Thirdly, look at how well the company is positioned to handle the disruption in the industry. Here, a moat or a special advantage can be useful. Finally, look at industries that are the future. Buying fossil fuel stocks for a 10 year perspective does not add value. You have to look at companies that are diversifying into renewable energy, green hydrogen etc. That is how you get the best stocks for long term investment and the best share for long term
The future of long term stock investing
Does long term investing approach have a future. People like Warren Buffet have consistently proved this hypothesis over the last 50 years. Long term stock investing is more of a systematic and disciplined approach wherein a long term value approach to stocks is taken. Here, the focus is more on companies that have delivered in the past and have the potential to continue to deliver in the future. Strong margins and high levels of financial efficiency need to be combined with a clear strategy to keep leverage under check. That is the key to the best stocks for long term investment and the best share for long term
Common mistakes to avoid when investing in long term stocks
Here are some common mistakes that people commit when it comes to long term investing.
• The first mistake is not investing. People often spend too much time waiting for a price bottom or a better price and in that process miss getting into the stock. Price matters, but only so much. The longer you are stuck to analysis, your investment decision gets delayed. You can never be 100% sure in stock investing. You have to make a reasonable estimate and then go with your gut to buy the best stocks to buy for long term.
• The second mistake is buying shares in businesses you do not really understand. There is something called the comfort zone. For example, if you are working in the steel sector, that is a sector you understand and other related sectors. You can focus on sectors or stocks where you really have expertise.
• The third mistake is putting all eggs in one basket. We spoke about diversification at length and putting all eggs in one basket basically means not diversifying. That is a dangerous approach as if you are too focused on one or two themes, and a downturn can pull the portfolio back quite fast. Focus on best share for long term investment.
• The fourth mistake is expecting your stock to work wonders. Have reasonable estimates of earning about 14-15% compounded returns on the stock over a longer time frame. A long term stock does not mean that every stock will be a multi-bagger. The normal ratio is that a few stocks work very well, many of them will be neutral and some of them will backfire. The trick is to hold on to winners and exit losers.
• The other mistake people often commit is to put money in stocks which they cannot risk for 3-5 years, at least. If you need the money back in 1 year, then equities are not the best place to be in. You need best share for long term investment.
• Finally, impatience can be the enemy of long term investing. When you are impatient, you tend to panic and in the process you subsidize the investor who does not panic. Long term investing does require a lot of patience and perseverance. That is how you get the best stocks to buy for long term
Benefits of investing in long term stocks for your future
Long term investing has several benefits like a clear business based approach, ability to generate and deliver long term returns, create wealth, offer benefits of automatic compounding of wealth etc. Above all, it has been empirically proven that any diversified portfolio rarely gives negative returns if held for more than 6-7 years. That also largely reduces the risk in long term investing. They are the best stocks to buy for long term
Conclusion
Long term investing is a time tested proposition. However, it is easier said than done. The pressures of investing are felt in real time when real money is involved.
FREQUENTLY ASKED QUESTIONS (FAQ)
How can I minimize my risk when investing in long-term stocks?
The golden rule to minimize risk is to diversify the portfolio across asset classes and themes.
What is the difference between short-term and long-term stock investing?
It is time period. Short term investing is normally up to one year, medium term investing is up to 5 years and long term investing is beyond 5 years.
Can I make significant profits from investing in long-term stocks?
That would depend on the stock selection. But to give an example, Sensex index has given 16.5% returns compounded over last 43 years. That should answer.
How does market volatility impact the value of long-term stocks?
Volatility adds to the risk and hence reduces the valuation of the stock. From a trader’s or investor’s perspective, volatility means stop losses can get triggered faster.
Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance. The risk of loss in trading and investment in Securities markets including Equites and Derivatives can be substantial.
