Recently I came across the NOISE about HDFC Bank completion of 25 years of IPO in May 2020. Rs.1 Lakh investment in HDFC Bank IPO is worth Rs.8 Crs today. Such stories always pop up in social media and force us to invest in a dream of having Rs.8 Crore after another 25 years. But we fail to understand some realities.
The social media sharing is as below.
“HDFC Bank completed 25 years since its IPO in May 1995…Without dividends reinvested the CAGR has been 25%. With dividends, reinvested CAGR is 30%. Max Correction has been 55%. A 1 cr investment in IPO is worth 800 Crs today, an awesome 800 times.”
If we go by such classic stories, we immediately believe that if it is true, then let us invest in HDFC Bank stock in a hope that in the next 25 years, we also must have such a huge wealth of around 800 times.
However, we forget the journey of these 25 years. There are so many ups and downs during this period. Hence, let us analyze the journey from this eye-catching tweet.
Rs.1 Lakh investment in HDFC Bank IPO is worth Rs.8 Crs today – But what about the journey?
# Rolling Returns
We have to agree that those who invested for 25 years without worrying about the up and downs during these 25 years have definitely benefited from this 800 times returns. However, we have to question ourselves like how many of those who still hold the stocks from the IPO date to today. May be few. The rest of all are hoping the same magic in the future. The magic happens or not only God knows. But we are all hoping 🙂
To understand the journey of HDFC Bank during these 25 years, let us use the 1 year, 3 years, 5 years, and 10 years rolling returns. Rolling returns will give us clarity about the volatility during these periods.
# 1 Yr Rolling Return
This is the 1-year rolling return from 1996 to 2020. The maximum return in this is almost 400% and the lowest is -53%. See the volatility of the stock during this 25 years journey. Also the return possibilities of whoever purchased for a year during this 25 years journey.
# 3 Years Rolling Return
Even during these 3 years rolling returns also, the highest returns are 71% and the lowest returns are -86%. Look at the above graph and you noticed the volatility of returns.
# 5 Years Rolling Returns
For many stock or equity investors, 5 years is a LONG TERM. However, if you look at the above graph, you noticed that the highest returns were 58% and the lowest was -18%.
# 10 Years Rolling Return
Even if we consider the 10 years rolling returns, the highest returns was 43% and the lowest was 10%.
Therefore, if go by the above graphs, you noticed that the journey was not smooth like usually these brokers or sellers try to highlight.
# Business Module
There is no doubt that HDFC Bank created huge wealth for its shareholders. Also, there is no doubt that its financials may be strong (I am not an expert in direct stock analysis and hence, I don’t want to go deeper into this). However, banking space changed a lot during these 25 years.
Hence, assuming the same return for the next 25 years is completely wrong.
# It is PATIENCE that is 8th wonder of the world but not compounding
I am repeating again of what I repeated in my earlier post (Power Of Compound Interest – NOT the 8th Wonder of the world!) that it is patience that is the 8th wonder fo the world but not compounding. However, these sellers or middlemen always try to highlight compounding as the 8th wonder fo the world. To enjoy the compounding effect, one must have great patience to sit TIGHTLY. No one is teaching you this art but all are showcasing such fancy numbers.
# Concentrate on DIVERSIFICATION
Many jump into investing without bothering the diversification in different asset classes or within the asset class. Because we too expect such 800 times returns within 25 years. Instead, one must understand their risk profile and the purpose of investing than BLIND investing.
# Time Value of MONEY
How many of us have Rs.1 lakh 25 years back? What was the value of Rs.1 lakh or Rs.1 Crore 25 years back? If we assume at least 6% inflation, then the same Rs.1 lakh in today’s term is Rs.4.3 Lakh and Rs.1 Crore in today’s term is Rs.4.3 Crore. How many of us have guts to invest such amount today in a SINGLE stock?
# Stories are meant to attract
Such stories are obviously meant to attract customers for their business. Never be in this trap. Even though the results are true, you have to analyze your risk profile, the purpose of the investment, and diversification mantra than BLIND investing.
Conclusion:-There is no doubt that HDFC Bank created such wealth to investors who stayed invested for these 25 years. However, to be invested in this stock for 25 years requires a lot of patience which many of us lack. At the same time a stomach to digest the up or downtrend in the stock price. Hence, never be in the trap of such stories and jump into investing BLINDLY.
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