Long-term wealth creation requires patience

Which financially strong companies have created maximum wealth for their shareholders in the last decade?

It's a fairly common question that everyone ponders on when investing in the stock market. To answer this question we applied the following filters on S&P BSE 500 companies:

• Trading history of at least ten years.
• Ten year median ROE exceeding 20 per cent

A total of 93 companies met our criteria. Out of them, the ten companies which generated maximum return for their shareholders in the last decade are listed below.

High median ROE signifies efficiency in profitability and superior capital allocation. As a result, the annual PAT and revenue growth over the last ten years of these companies has been in double digits.

The question now is, assuming that an investor discovered these companies as good investment opportunities ten years ago, will they hold on to it through the highs and lows of the market to fully realise the potential of stock price growth?

A test of mettle
Stocks go up, but they also go down. So, the market can be pretty unreasonable in the short run, and prices erratic. Constantly changing investor sentiments influence the direction in which the market moves. Even the best companies experience massive falls in share prices over a certain period. Similarly, all the companies on our list have also seen their share prices drop at times.

For instance, the table below depicts the number of times each of these 10 companies' shares have fallen by at least 20 per cent in the last decade. This fall is calculated by considering the highest price in a given year and the lowest price in the next year.

All the companies recorded an average share price fall exceeding 20 per cent. Moreover, the price has fallen by at least 20 per cent multiple times in the last 10 years. It is fair to say that such fluctuations are part and parcel of investing.

In any 10 years, there are multiple instances where a company's business goes through rough waters. Consequently, its share price nosedives. These are the instances that test your patience as an investor. What do you do with your shares?

Remember
After you have checked a company and ensured its solid fundamentals, you should be patient. When your stock price plunges, you need to remember that fundamentals matter in the long run.

To a large extent, the conviction and patience of an investor to remain invested in a company determines the eventual returns earned from it. That is why, even if an investor had discovered these potential multibaggers early, many would not have earned an extraordinary return because of an early exit.

Also read: How to gain conviction in a stock - and stick to it

This article was originally published on October 18, 2023.