Portfolio Re-Structuring/25% CAGR quality-growth for next 2-3 years

[zoro99]

@Donald : This is excellent stuff, 54 % XIRR is phenomenal. However from the kind of transactions (attached excel in ur post) it seems he is able to devote enough time and portfolio is churn is quite regular .

There are no transactions during Feb-16 and Dec-16 when mkt fear was at peak. Should such extreme fear periods be avoided till one gets some clear direction where mkt is headed?

And Sir I would also request you to please update the VP Model portfolio (ValuePickr Public Portfolio) as its not been updated for quite a while.

[manishkdwivedi]

One important take away for me is that selling is equally important, and perhaps much more difficult, than buying. I have quite a few stocks from this portfolio, holding them from 2010 time frame but my return is no where close to this.

[Donald]

@zoro99
Yes, this is an active investors portfolio. He had also provided snapshots of the Portfolio on Nov 2013, and Mar 2015, which can give a glimpse into capital allocations - which is probably key to the good performance of the Portfolio.

@zoro99
there is no snapshot provided of the Initial Portfolio, but can be re-constructed by those curious, from the tradebook. Initial churn 2011and 2012 would have been influenced by VP style businesses. Post that there is churn, though limited, and evidence of holding on to performing businesses. There is also good churn in 2016 (unlike you mentioned) - evidence of willingness to let go - what doesn’t seem to be working, while getting on to new businesses.

@manishkdwivedi
Yes. These are all known names. There seems to be evidence of buying with good margin of safety. And as you said - good lessons in selling - which is the much harder ART form - you are absolutely right. Obviously, for every learner there will be misses in these calls. But seems to be many more hits, than misses. And again, high capital allocation based on conviction/undervaluation at buy times, has provided the cushion-capital at sell times, to shift to newer horses.

[rupeshtatiya]

@Donald
Thank you and your friend for being generous enough to share the portfolio. Thank you for showing us that achieving high returns with VP method is possible.

Now some cautionary points -
Like all mutual fund advertisements, the starting year is chosen when indices were low and not hot. Between 2009-2017, BSE midcap index itself has been 5-bagger.
If someone started following VP in say, 2014 or 2015 - I wonder how his returns would look? Would that portfolio have beaten BSE small cap index?

As per chapter “Adding Value” from HM book, VP method definitely adds value in good times (2x more return than market), I hope we will not lose as much in bad times and always get superior return.

Also getting stuck on a fixed number (like 26% return) might lead to aggressive action in low return environment (like peaks we are seeing today) and one can risk losing some capital.

So all I want to say is - let’s embed ample amount of caution in VP thread so that people do not make mistakes and lose capital (like I lost capital post Modi rally buying into Euphoria in FY16).

I am eternally cautios/skeptical person and just trying to ebb the euphoria a little. Hope that’s fine.

Regards,
Rupesh

[Donald]

@rupeshtatiya
Absolutely. The purpose of this thread - restructuring Portfolio on a continuous basis - not to bask in glory. The friend is sharing for a “ulterior” purpose

There are areas in this portfolio where froth is developing - and there is high allocation - case in point - Avanti Feeds (approaching 25x trailing). One could make a case for booking some profits there, and shift capital to where there is GAP between Price - Value. Not an easy Task! But that’s the nature of the game - one has to remain eternally vigilant!, and work hard at establishing Value :). One could make the same case of booking some profits in Shilpa Medicare, and Canfin Homes too.

You make a good point - how would returns look for someone who started in 2014 and 2015 - modelling largely on VP-style investing? Obviously the timeframes involved are too short to make generalisations - but the exercise would nevertheless be instructive!

Let me try and motivate some friends to share 2 such Portfolios and Trade Book, so authenticity can be established, and learning from buy/sell dissection is more meaningful.

[RamanTiwari]

Donald: Thanks for sharing this, a few thoughts on portfolio:

No doubt a great performance, valuepickr has no doubt beaten returns delivered by professionals… a few observations:

• Portfolio has a lot of great stocks but somehow I don’t see a strategy of maintaining a portfolio specifically:Why are there so many less than 5% allocation stocks in here, its better combine these and allocate to one of already performing stock
• A strategy quite often used is to add to performing stocks, where if earnings are inline with expectations and even if stock goes up then load it up (and not average by churning to other stocks)… there could be many examples of this, one eg here: can fin despite an early allocation couldn’t be a part of portfolio success story
• Last: Some fascination with buying stocks in 00’s again, this should be driven by portfolio balance

Overall I see low priority given to churning non performers and high preference to buying stocks than to portfolio allocation.

[Donald]

@RamanTiwari
Valid observations. At the same time one has to be cognisant - that no one becomes perfect at everything from day one:). Key aspect to note - is the person becoming better at the game - allocating more to “his” high conviction ideas (not what has performed best in market - easy to deliver a verdict on hindsight), and becoming more adept at moving out of non-performers, in the same vein.

There is visible improvement in allocation ratios progressively - from wild 30% allocations in 2013 Portfolio, to progressive moderations, to weeding out marginal allocations towards a much more balanced allocation, probably in 2017. From what I can see CanFin Homes has been progressively sold to half the quantity (between 2015 and 2017, else that would have been a 10% allocation at this stage). That may be a reflection on his conviction/overvaluation call.

Considering that allocations-shift are done in a dynamic environment, it may be too much of an ask (even for practised fund managers) to achieve picture-perfect allocations - where conviction and undervaluation both demands are met equally - in market conditions prevalent since mid 2014, say.

For a learning practitioner of the game, key aspect to observe/dissect - quality of progressive choices being made/allocation strategy refinement. Personally, I am happy to note progress on both these aspects.

[catchsudipto]

Thanks for sharing. What about bajaj finance? does it qualify for some profit booking also as its very expensive even on future earning. Thanks again for raising the forth issue.

[Alphin]

Dear Donald,

Thanks for sharing the portfolio. It has been an eye opener about the potential of VP picks. Could you also share how the net-worth of the person is allocated? Eg. Cash holding? MF? Gold? Property etc… also background of the person and risk appetite would be very helpful.

[RamanTiwari]

Towards a Capital Allocation Framework!

Mr D asked me "Suppose you had 5 good picks. How would you allocate your money among them? I suppose today you do it randomly, or roughly equally" I was stumped and had to admit I was doing it pretty randomly. So I asked him "How would you do it Mr D"? He said, see if you like my method: Undervalued Conviction Allocation High vs High Highest allocation High vs Medium Normal allocation Medium vs High Normal allocation Medium …

Understand that Donald, I do not track all the stocks listed here, but the above framework needs to be applied here with specific effort to reduce all less than 5% allocations

@Alphin: Even if this person has allocated 30% of the portfolio to stocks, at CMP all other portfolios would be minuscule and combined contribution of other assets would be less than 20% now.
Though theoretically many newspaper articles/wealth advisors would suggest 30% each to stocks, real-estate and gold/FD… practically if stocks do good, everything else automatically becomes negligible.over the long term - provided one doesn’t to transfer gains from stocks to other assets. All big investors have almost everything in stocks and are averse to other assets

[sandeeprawat]

Thanks for sharing this.
The tradebook practically shows what we have only been reading so far in this forum. Difference from initial snapshot to the one in 2017 tells about the learning this person had in past couple of years. I was wondering why was Avanti sold in nov-16 but now looking at the current PF allocation it makes much more sense.

While I can’t say if this friend had the same thought process but for me I feel it shows the importance of the following

1. Emotionless investment philosophy (emotion-free investment I think would be very difficult if not impossible)
2. Continuous exercise to have a balanced portfolio. I see high conviction bets but at the same time no trend reversal in single bet/sector is going to destroy the entire portfolio.
3. More importantly, it shows the VP values. Perfect example of “practice what you preach”. PF may go up or down. Bets may not realize in future but at the end of the day at least we can be sure that there was transparency.

It would be great if the person could share his thought process on the major decision points.

[Divyanshu_Taneja]

Thanks sir for sharing this, what about premco global since last quarter was week @Donald sir would request you to update VP model portfolio

[spectralradius]

31% annualized since jul 2013, although portfolio does hv typical valuepickr stocks, but there are some others that have also contributed significantly like piramal (core holding), gic housing (hitesh bhai pointer), jbchemicals

[umang_1991]

Donaldji XIRR of more than 50% is unimaginable, unbelievable, commendable and all other adjectives put together. But key thing IMHO is is this success repeatable? The advantage to those investors starting in 2012/13 is no longer available to those starting in 2016/17… Everything now is priced to perfection. All the good companies are so highly priced that you could get stuck in them in case some downtrend starts. Further there nothing to gain from multiple expansion, rather there is a risk of contraction. How show one proceed to build a portfolio, if at all it is possible to build one in such times…only thing which is cheap now IT which seems like a dying business. Pharma to an extent, but the sector has become pitty unreliable with us fda wrath coming more often than past, we may not like such volatile bouts in our portfolio.

[Peabody]

Thank you Donald for re-energizing this thread. ROI of 50%+ is a dream come true scenario. Few questions -

1. If some of the scrips become frothy which will happen in a ragiing bull market like the current one- Do we get out or downsize our holdings.? And get in again when there is serious correction (wait could be 6m to 1yr)
2. Or as a LT investor hold on even thru a correction but portfolio may be impacted
3. If we follow what is being suggested- trim during overvaluation or load up on correction- Are we trying to time the market ? Then what happens to the compounding story or costs associated with getting out and getting in (taxes ,brokerage etc)

Personally I struggle in this area especially like the current scenario. And what we think is overvaluation may be wrong because the market may be getting into a different orbit with many positives lined up. I am only referring to solid growth scrips here for reference. If there is a correction all scrips go down without exception

[Donald]

@Alphin
Less than 10% of the person’s net worth is in equities, so he sleeps well :). He is also an Entrepreneur - so he is what can be called a “Calculated” Risk Taker.

@sandeeprawat
Yes. Not being in love with businesses that make you a lot of money. Everyone can aspire to get better here - admire & imitate Hitesh Patel like emotionless-investing quality. Building and getting better with a process that helps one spot and dissect Competitive Position/Industry stability getting weaker is key. A business introspection process that is repeatable, every 6 months.

@Divyanshu_Taneja
Premco Global seems like a good business with very decent earnings quality. Execution has got delayed and that has put off Mr Market. Once execution is back on track, growth should be back, making Mr Market happy again. But one should keep in mind this is a very small business - a micro cap. Liquidity is poor. Good execution in next 2-3 years, where it shows the capability of harnessing the opportunities before it, may take the business to the next level.

@umang_1991
There are no easy answers, here. One has to be very choosy, and very patient. It helps to keep reminding ourselves that Mr Market invariably gives us opportunities to buy 2-3 times every year, at reasonable valuations. Questions is: Do we have our homework ready - in what to buy at such times? Most folks end up confused. Folks could have easily bought Bajaj Finance 40% cheaper during the year, or an HDFC bank, IndusInd Bank, and many many more established, discovered names.

It’s about having a process and the discipline needed for long-term compounding. Having the courage/resolve to defer “instant gratification” impulse hard-wired in all of us - to stay away from fear and greed. It helps to surround ourselves with prolific idea generator guys like Ayush and Hitesh - so we can avoid that feeling of “missing out” and score one or two hits - they are never short of workable ideas, in any market!!

Its not about our performance in next 6 months, or next 2 years. Its about understanding our selves - our weaknesses/strong points, working closely together with folks who are different than us and compliment our style. Appreciating the work-ethic and hard work needed for success, developing a process that works (starts happening intuitively for the sincere learner - not the multi-bagger chaser) and ingraining the discipline to stick with that process - come what may

So, no use making excuses - yaar, I don’t have the good fortune of starting in a bear market; make the most of what we have now; there are huge number of folks who have made extra-ordinary money this year from making non-consensus bets, lets learn something of that style. Appreciating different market cycles, observing what is happening keenly, having the openness to respect every successful investor style are attributes that will stand us in good stead, in near future.

I can guarantee - you, and every one of us will get a bear market, again!!
This is the best time to start preparing for it, in earnest. Goldmine of opportunity time!! Conserve Money, be cautious, examine businesses that are making money for us very critically. Keep taking some money off the table - progressively as the market keeps heating up! Keep working on our ability (and fund-chest) to ACT, when the market opportunity presents itself. It invariably will

@Peabody
All of us struggle with this. ART of Selling is the most tricky, but one can progressively get better at this skill. I have found spreading the buying - over 2-3 years usually - as we develop conviction and watch management walking the talk works for me. Similarly spreading the selling - works beautifully too. This addresses the main point raised by you - why make that call - to what crazy levels the market will take my favourite business to?? We CAN’T know that.

All things being equal, for industry/business performing as expected - but valuations racing away - progressively taking money off the table, respecting that inner thing that makes us uncomfortable - as we see more froth developing - as the market goes crazier, works for me. I like to draw the line at higher than 2x fair valuation estimate (business category B+. A, A+. A++), to start selling something like 20% at a time. I DO NOT subscribe to the buy and hold quality growth business - through any price - ethos. It has huge opportunity costs. Something that goes down 50% has to go up 100% - just to recover!!

[Divyanshu_Taneja]

@Donald

Let me try and motivate some friends to share 2 such Portfolios and Trade Book, so authenticity can be established, and learning from buy/sell dissection is more meaningful.

First of all Thanks Sir, For giving us enthusiasm by this thread that we can also generate good returns if we focus on objective by analysing the business and on other points
Secondly sir we are waiting Eagerly for more such portfolios!!

[amitsethiya4u]

As an entrepreneur, I can empthasize to an extent with that particular portfolio. An entrepreneur will always prefer to invest his/her captial in their own business first and anything over and above that (Idle capital) will be invested in other forms say equities. That could be the main reason i can guess.

[valuedude75]

My suggestion is to not anchor on the equity % in the overall portfolio. Much like stock price driving valuation. More interesting to note how the opportunity costs were evaluated at each point in time to - decide on investing additional capital or to restructure the portfolio. The % equity allocation can be a function of various factors and much dependent on the individual. If instead of +30% CAGR it had been -yy% CAGR in a market that went to the South Pole (i.e more negative than portfolio returns) the dialogue would have been diametrically opposite…