GO LONG says Mr Mulraj, an expert in investment advice

When it comes to investing, it is necessary to do your homework. Studying the financials of the company, meet the management; evaluate performance against the peers, etc. These are just some of the points that you cover when judging if a stock can be invested into or not. After doing the groundwork, you study the company's valuations. If it is available at cheap and attractive valuations, you go ahead and invest your money in it. But having purchased the stock, the big question is what next? How long should you hold the stock for it to deliver that fantastic performance that you want and expect?

The answer to this question should ideally be never. But unfortunately not everyone would go for this option. So we decided to discuss the other options available. To understand the options better we collected some statistical evidence. The data we have taken is for the BSE-Sensex to show shows the returns investors would have fetched had they invested in the BSE Sensex 10, 5, 3 and 1 year back respectively. The following chart gives the CAGR returns that you would have earned on the closing price of 22nd February, 2013.

Source: BSE

It must be noted here that the 5 year performance looks depressed because of bull period that Indian markets enjoyed till 2008. Nevertheless, the picture is still quite clear. If stocks were held for one year or a three year period, the compounded annual returns. (CAGR) that one would earn would be a meager 6%. On the other hand, if you had held on to the stock for 10 years, the CAGR would have been an amazing 19%. And this is just the returns in prices. It does not include the returns earned through dividends.

This gives a fair idea on how long the stock should be held. The answer is for a long term horizon. The thing is that there can be periods of time when irrationality and emotion, rather than fundamentals will drive stock prices. And such periods, of excessive greed or fear, could last for months, if not years. But sooner or later rationality is bound to return to the market and then, stock markets have to value companies based on what they are truly worth. Naturally one cannot expect this to happen in short term periods. It can only happen in the long term.

So the recipe to get rich through investing is actually a simple one. Do your homework. Buy the stock at cheap valuations. Then sit back and rest. In the long term, you will reap spectacular gains for sure. But remember what we are advocating is a Buy and Hold approach. Not a buy and forget philosophy. Periodic checkups are necessary to ensure that the fundamentals of the company are intact. And as long as they are, continue to hold it for a long term.