Gautam Baid: The 4% Rule: How Top-Performing Stocks Drive Wealth Creation

During this interview with The Investor’s Podcast, Gautam Baid discusses the success of his India fund, which has grown 18 percent in its first 12 months. He emphasises the importance of holding onto winning stocks, as he found that only a small percentage of stocks contributed significantly to the fund’s returns, highlighting the power of compounding and letting winners run. Here’s an excerpt from the interview:

Baid: You know, I’ll give you a live example from my own India fund, which I’ve been running for the last 12 months. So our India fund went live on 3rd October last year. It’s up 18 percent in the first 12 months. And when I was doing a portfolio attribution analysis to see which stocks contributed the most. It was surprising to me that four stocks out of the initial 23 stocks accounted for more than 80 percent of the overall return of the fund in the first 12 months.

The other 19 stocks hardly contributed. And this is again, the power of compounding at play, convexity on the upside. You let the winners run. Let them become big winners because you know investing is a probabilistic activity. You’re going to be wrong a lot of the time, but as long as you make your winners count and don’t blow up in any of the other picks, you’ll do very, very well at an aggregate portfolio level.

Very powerful principle, positive asymmetry, and just reinforces the power of holding onto your winners.

I would like to share two pieces of statistics here just to know, because this is such an important topic that very few people talk about the importance of holding on. I want to share two statistics here with your audience so that they understand just why it is so, so critical and important to hold on to your winners for dear life.

Between 1926 and 2018 in the U. S. market, only 4 percent of all listed equities accounted for 100 percent of the wealth creation. I’ll again repeat, in those 92 years, only 4 percent of of all listed equities in this country accounted for 100 percent of the wealth creation, which means that once you have found the goose that lays the golden eggs, don’t kill the goose, hold on to it for dear life because 96 percent will fail or not really work out. It’s only those 4%.

So when you find one of them, if you’re lucky enough to find one of them in your lifetime, make them count. So that’s the first statistic from the U. S. market. Now I’ll share, and this powered law is not just applicable in the U. S. market, it’s applicable to markets around the world, including India.

In India, between 1990 and 2018, during those 28 years, only 1%, only 1 percent of all listed equities accounted for 90 percent of the wealth creation, or market cap creation in India. Just think about that. Just 1 percent out of 4,000 listed companies, which means that if you found, if you were lucky enough to identify one or two out of those 40 stocks in that 30 year period, you should have held on to it to, you know, really change your life as an investor.

So, you know, many, you know, it’s very easy to identify a winning stock. But it’s not easy to hold onto it. So once you have found a great company growing at a healthy clip and it continues to grow at a healthy clip and it’s maintaining its competitive advantage, hold onto it.

You can watch the entire discussion here: