“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffett
Our favorite holding period is forever.” – Warren Buffett
“If the job has been correctly done when a common stock is purchased, the time to sell is almost never.” – Phil Fisher
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.
EXPECTATIONS_VS_ACHIEVEMENT | CO_NAME | AVERAGE of RETURNS | |
|---|---|---|---|
| DID_NOT_MEET | Avanti Feeds Ltd | -16.72% | |
| GRUH Finance Ltd | 112.83% | ||
| HDFC Bank Ltd | 80.94% | ||
| Hindustan Unilever Ltd | 12.76% | ||
| Housing Development Finance Corporation Ltd | 20.03% | ||
| IndusInd Bank Ltd | 10.75% | ||
| ITC Ltd | 8.47% | ||
| DID_NOT_MEET Total | 14.68% | ||
| EXCEEDS | Avanti Feeds Ltd | 106.28% | |
| Bajaj Finance Ltd | 72.45% | ||
| GRUH Finance Ltd | 38.41% | ||
| HDFC Bank Ltd | 19.64% | ||
| Hindustan Unilever Ltd | 29.07% | ||
| Housing Development Finance Corporation Ltd | 27.23% | ||
| IndusInd Bank Ltd | 29.53% | ||
| ITC Ltd | 39.36% | ||
| Page Industries Ltd | 84.86% | ||
| EXCEEDS Total | 52.10% | ||
| MEETS | Bajaj Finance Ltd | 3.86% | |
| GRUH Finance Ltd | 47.88% | ||
| HDFC Bank Ltd | 33.29% | ||
| Hindustan Unilever Ltd | 37.21% | ||
| Housing Development Finance Corporation Ltd | 17.38% | ||
| IndusInd Bank Ltd | 76.80% | ||
| ITC Ltd | 11.25% | ||
| Page Industries Ltd | -5.43% | ||
| MEETS Total | 31.40% |
Most of the time ppl fail to get out when earlier set expectations are met and then end up sitting on stock which gives meager or no returns. Catching the knife in the air is not easy. What is the hit and miss ratio of EVM midel?
Pls read as EVM model
I will publish detailed back test results soon, but on an average, more than 80% of the stocks have given positive returns in the last 12 years of testing.
Great to see such a HUGE average positive number. Pls share test results and what can be done to subscribe here? Are you willing to share EVM tip/manage portfolio service etc? If yes, will there be evaluation period to verify returns [willing to share profits even in evaluation period too if this works :-)]
The huge numbers represent theoretical returns. I will publish "real-life" test results soon.
For this year, I will publish the model based portfolio with everyone in the first week of June. I will suggest you to verify the performance before investing or trusting the model.
The subscription model will be initiated next year.
Would be great to know the actual back test results for your model for the same time range as the hypothetical back test.
This post gives the real life (actual) back test result, for the last 14 years. https://expectationsvalue.blogspot.com/2019/05/05-real-life-test.html