Question: An article stated that, “Legendary investor Warren Buffett holds Coca-Cola in his portfolio and the stock has multiplied almost 15 times since he first bought in 1988. Among other reasons, the key factor that prompted Buffett to buy Coca-Cola (as he later clarified) was that he believed in the simplicity and sustainability of its business, factors that hold steady to date as well”.
If this money was invested in the bank FD in 1988, even after discounting inflation, wouldn’t it deliver better returns today? Did the author mean 15 times annual growth?
Some stocks I purchased in the year 2006 are giving me a return more than 200% today. Annual average 50%.
Where I have gone wrong? Please correct my thinking?
Mr. Gerard Colaco: The issue has to be seen in perspective. In the last 30 years, the Indian stock markets have grown at 18% per annum compounded. Long-term Indian bank deposits would have averaged about 9% per annum during the period. However, the US stock market grew by not more than 10% compounded annualized during the same period.
Now, even if we take the US bank deposit growth to be an inflated 6% compounded annualised, $100,000/- invested in the bank deposit would grow to only $ 340,000/- approximately in 15 years that is 3.4 times. This is at compounded annualised growth rates of 6%. What the article read by you is saying is that Warren Buffett’s $ 100,000/- in Coca-Cola grew to $ 1,500,000/- during the same time period. Fifteen times is 1,500% simple. The compounded annualised returns here would be something like 13.75%, beating not just the bank deposit returns but also the returns of the US stock market as represented by the S&P 500 index.
Returns in the Indian stock market of course would be much higher, but then so would the risk and volatility. In a diversified portfolio, there will be a leaders and laggards. Some stocks will multiply to such an extent that you will consider them multi-baggers. There will be other stocks that do not give you expected returns even after a long time.
I remember a client at our office who by sheer luck invested approximately Rs. 10 lakhs in the stock market in early 2003 when the Sensex was 3,200 or so. Hardly a couple of years later his investment was worth Rs. 25 lakhs because of the boom. He sold the shares because he wanted to buy an apartment in Bangalore. When we liquidated his portfolio we were surprised to see that out of the 45 or so stocks therein, about half-a-dozen stocks were showing losses. Another 4 o 5 did not show much change from the original prices at which they were purchased. Yet, the portfolio had showed returns of 250%!
As Dr. William Bernstein says, “Appreciate that diversified portfolios behave very differently from the individual assets in them, in much the same way that a cake tastes different from the shortening, flour, butter and sugar. This is called portfolio theory and is critical to your future success”.
To conclude, it is better not to get elated because some stocks have given you superlative returns, just as you should never be dejected, because other areas of your portfolio are under-performing. The key factor is whether in period of 5 years or more, your portfolio is returning approximately 15% per annum compounded, which is the optimum return if you are an investor in the Indian stock market. I love the word ‘optimum’. Most investors strive for the maximum and end up with a minimum return. But those who attempt to get the optimum return, very often find themselves being awarded with a return that is greater than optimum!