Many investors buy and sell stocks over short periods, trying to capture market opportunities and maximize their returns. However, frequent portfolio activity does not always improve performance and may even reduce gains when investment decisions prove wrong.
This is exactly what Saurabh Mukherjea, author, founder and Chief Investment Officer of Marcellus Investment Managers, highlighted in a recent interview with Mint Extraclass. Citing an example, he said that a that delivered around 14% returns throughout its holding period could have earned about 15.5%, had his team simply stayed invested for longer.
“I felt I should do some buying and selling to demonstrate my skills and exercise my judgment. There was plenty of data to analyze from company conference calls and broker notes to annual reports and AI feeds. But, as I showed, the buying and selling added zero value,” he noted.
He is better known for his Coffee Can investing strategy, which essentially means finding companies that have grown revenue and earned high returns on capital year after year, buy them, then leave the portfolio alone for a decade.
Why is staying invested advisable?
Staying invested is advisable because investment decisions are based on human judgment, which can be right at times and wrong at others. Mukherjea cited examples such as predicting whether Marico, Asian Paints or would turn around, noting that such judgments are inherently fallible.
“The less you do with your portfolio, the more likely you will beat the benchmark by some distance, and you will end up making a good sum of money from that,” he said during the interview.
When should investors hold on to a stock?
When asked about the threshold for deciding whether to continue holding a stock, such as HDFC Bank’s stock, which had been under pressure for the last five consecutive years, Mukherjea said that investors need to get only two or three stocks right in a portfolio of say 15 stocks.
“You gave me ₹100, I put ₹50 in a stock which went to zero overnight, but I also put ₹50 in another stock which did exceptionally well. In this case, the stock which gave negative returns gets overshadowed by the other which is running right,” he explained.
Investors are often tempted to sell a stock after a prolonged drop, but Mukherjea argued that short-term price movements should not be viewed in isolation. He cited HDFC Bank, whose stock had fallen by around 30% since November last year, even as its underlying earnings, liabilities, deposit growth and asset quality remained stable throughout this period.
He said Marcellus had also spent time visiting HDFC Bank branches and those of its competitors. According to him, the quality of HDFC Bank’s staff remained significantly better than that of most competitors, suggesting that the bank’s underlying franchise remained strong despite the post-merger challenges.
Mukherjea warned that investors could make flawed decisions if they ignored fundamentals and instead reacted to market chatter, media coverage or boardroom-related concerns.
“Let’s assume a doomsday scenario, where some public-sector banker is made the CEO of HDFC Bank. My hunch is that the market will crash the stock that day…Perhaps, under pressure and the influence of popular and social media, we will also say, Let’s get rid of it. But then it may turn out that, a couple of years later, the public-sector banker retires, or that the banker behaves in a completely different way,” he said, suggesting that the eventual outcome of a stock’s performance could differ significantly from what the market initially feared.
“As soon as you mess around with the portfolio, as soon as you try to exercise judgment, the risk you run is that stock B, which could have made you 10x in 10 years, you fiddle around with that,” he added.
He added that Marcellus’ data showed that such portfolio “fiddling around” tended to detract from returns by around 1.5 percentage points, while its live portfolio had outperformed the benchmark by around 2–3%.