I came across this tweet yesterday, and I think this highlights an advantage of index investing.
In mid 2000s, NTPC came out with an IPO at 72 per share. I applied & was allotted 200 shares.
— Arvind Datta (@datta_arvind) August 21, 2021
I sold them within 2-3 years of listing at 145 per share.
In last 15 years the stocks has been stuck in a range between 70 and 150
When seen with the context of inflation, NTPC is just losing money. Losing money through such a stock is a risk an index investor systemically avoids. A value investor might hold onto NTPC hoping that the price will eventually go up. It’ll be baffling to such an investor that you’d sell off a company just because it’s stopped satisfying an arbitrary requirement. (Other than whole market indices, everything else, including Nifty 50, Sensex, and S&P 500, pick an arbitrary number of companies.)
It’s possible that a company is kicked out of the Nifty 50 index today, but joins the index again a few years later at a higher valuation. A value investor that holds onto such a company throughout the journey will be satisfied at the end. But an index investor will be selling when the company leaves the index and buying again at a higher price when the same company rejoins the index. An index investor should be comfortable with such a turn of events.
Corollary: If you are an index investor but you cannot stomach buying expensive stocks, you should reconsider your investing style. Maybe you are a value investor in your heart, but you’re investing in indices because that’s more fashionable.
PS: Investing in whole market indices does not remove this risk. I am only considering indices that pick top N companies by market cap. Vast majority of index investors in India invest in such a “top N” indices.
PPS: To be 100% clear: I don’t know anything about NTPC; I don’t even know the full name of the company. I am not claiming that NTPC is a value stock. I am only talking about a hypothetical investor who thinks NTPC is a value pick.
