Most successful investor stories revolve around the concept of buying good stocks and holding them forever. Rakesh Jhunjhunwala has been holding Titan for a long time, Warren Buffet hold Coca-Cola for years, Motilal Oswal takes pride in their strategy of “Buy Right & Sit Tight”. There are so many more examples harp in the same aspect, find a great company and hold on to it for your dear life! 

What, then, is expectations value model’s favourite or recommended holding period: 1 Year!!

The idea is to take profits off the table and reinvest in companies that have a chance to give larger returns as compared to the current portfolio.

Expectations Value Model (EVM) focuses on identifying stocks which can meet the expected performance for that year. Both, the expected performance derivation and the viability check is based on fundamental analysis of the companies. This ensures that the selected stocks are “good” companies.

When such good companies are identified by the markets, the human aspects of trading take over. Market participants see value, the demand goes high, the price increases and at a certain point, the expectations from the stock at that price become unreasonable.

Taking the profit off the tables shields us from the possible under-performance the following year.

In the recent past, Avanti Feeds, Page Industries, Eicher Motors are excellent examples of such stocks. If you both these stocks in 2012-13, you are making good money, but you would have been better off selling them in the peak of 2017 and then investing that amount in the next lot of good companies or simple keep the money in fixed deposits.

Lets take the example of two excellent companies: Reliance Industries and Hindustan Unilever.

Reliance gave almost zero returns from Sep 2007 to 2017, and I am not even considering the peak of 2008. Was Reliance not a great company for these 10 years?

HUL stock price remained at 250 levels from 2000 to 2010, 10 years HUL gave almost zero returns. This at a time when inflation was in double digits. Was HUL not a great company for all these 10 years?

The answer brings us back to EVM. These stocks just failed to or barely met the market expectations during these years and hence the lackluster performance. Would it not have been prudent to buy other good companies during this time to generate returns?

Check out the stock price returns over the years as compared to their expected performance here.

For the limited universe selected of all good companies, you will see that the companies gave an average return of over 52.1% when they exceeded the expectations and only returned 14.68% when they missed the expectations.