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


(Donald Francis) #230

While we will leave elucidation of the rest to a later time ( hopefully we can get HIM to speak at a VP Conference at a future date), please everyone sit up and take notice of the last line

Extreme Patience + Extreme Decisiveness

This friend says if you study Munger you will come to appreciate how important this is - in the context of Outperformance. At the same time these two are completely opposite attributes. Those who can (naturally) show extreme patience, usually can’t be that decisive …they are (usually) lazy folks ( who knows that better than me). He says one needs to be aware of this “dichotomy” all the time, and TRAIN oneself for decisiveness. You need extreme CLARITY and a few processes for that…but that’s subject for a later session.

While extreme patience and extreme decisiveness are for super-heores, I think every hard-working guy amongst us can aspire to achieve great patience + great decisiveness - something both these portfolios amply demonstrate!

In my book, all things being equal - everyone knowing that these are indeed superior businesses - is neither here nor there :wink:. The Proof of the Pudding is in the Eating …and that to me means Execution…having the patience, and knowing when to strike !!


(Donald Francis) #231

Hey Vijay,

You do make a valid point. However, I don’t understand what’s the 'real" grouse here. in the good old days the job was very easy - just maintaining and pointing to the VP Public Portfolio did the job - there was no “bias” anyone could attribute us to:). Now with SEBI restrictions, we can’t do that, so we have to resort to other tricks. The attempt is to provide pointers to the Community about not only which kind of businesses to focus on, but also on being strict about the need to UNDERPAY, in an indirect unobtrusive
way.

Sharing the Tradebook, along with the Portfolios serve that very important purpose. Just ask yourself, how many folks will be willing to expose their transaction history…like these few folks have?? So instead of finding a grouse, I am actually grateful to these guys who have the guts to share transparently the mistakes made, along with the winning shots. That’s active learning for me.

Now to come to the other point, those businesses that have delivered results in the last 1 year are superior, others aren’t?

That isn’t a fair question. If you see the earlier response to Kimi, even you will have to admit - these are businesses that have delivered results over last several years - A Gruh Finance, HDFC Bank, Bajaj Finance, PI Industries, Avanti Feeds, and a mix of new growers.

A successful portfolio can be constructed with a good mix of many different shades. No disputes about that. Why would anyone think other Portfolios that had some of the non-performers in a single year or couple of years, be not capable of Outperformance. Certainly, there are many out there.

I would love to see many more such shades of Portfolios and present them here. But most folks back out when confronted with the request for a complete transaction history to accompany the Portfolio. You can certainly help encourage others to provide us with more examples.


(Vijayk) #232

Donald,

It is not a grouse, but survivor-ship bias. There are 1000 mutual funds out there.
Every year, a few mutual funds deliver 50% returns, and next year another set of mutual funds deliver 50% returns.
We all know this thing. There are bound to be out-performances by some mutual funds every year.

That was the point.
One can always look back and see which mutual funds out-performed in last 1 year.

That’s also why fund houses have 10-40 schemes/fund house. Every year, one or other scheme will out-perform the mkt from their one fund house- which they can advertise in media- to show their superior performance vs market, and fooling the Public.

Am not sure, how this tradebook sharing etc. is helpful. An individual usually has 3-4 demat accounts (including family), and he shared tradebook of one account with you. One of my accounts had only 3 trades with 4 stocks in last 1 yr, with 105% returns. Again survivor-ship bias vs my other accounts.

Cheers


(Bheeshma Sanghani) #233

Hi @Vijayk

The point you are making about survivorship bias holds true of course - but only for random events. When success is more a function of luck or chance rather than deliberate action. Survivorship bias in its pure meaning or data snooping as its called in stats is focusing on the lucky few that have survived due to the way chance works. That is the proper definition.

Coming back everyone in the value investing world has heard of the famous speech by warren buffet - the super investors of graham and doddsville.

Michael Jensen who inspired the speech by WB had the same argument - every once in a while a series of coin tosses would produce winners. Those lucky coins are the ones that “survive”.

However WB presented the portfolios of these lucky coins and all of them came from the same Benjamin Graham school of thought. All of them. 100%.

This was in 1984.

This is the point that i think @Donald is trying to drive home. This stuff works. It worked in 1984 and it works now.

My intention is to not to oppose but present my honest views. So any contrary views have to be taken in that spirit only.

Sincerely
Bheeshma


(Donald Francis) #234

Meanwhile let’s turn attention to the point that is getting neglected in all this up-and-down debate - Structuring/Restructuring of a Performing Portfolio - so that it continues to perform in different market cycles - more like an all-weather portfolio.

HM has devoted an entire chapter 8: Being attentive to cycles.

He says, "The more time I spend in the world of investing, the more I appreciate the underlying cyclicality of things. In November 2001 I devoted an entire memo to the subject. I titled it “You Can’t Predict. You Can Prepare,”**

In investing, as in life, there are very few sure things. Values can evaporate, estimates can be wrong, circumstances can change and “sure things” can fail. However, there are two concepts we can hold to with confidence: • Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.

The same senior investor friend who spoke about training for extreme Patience + extreme decisiveness, also narrates this - "even HM says, its the Cycle, stupid" while emphasising the importance of Rule No 2 - to sustained OutPerformance.

In my opinion, the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you’re going. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move. And so we’d better understand all we can about cycles and their behaviour. You cant Predict. You can Prepare

In my experience of active investing over last 6-7 years, I have become conscious that in our quest to become well-rounded investors - the highest level of refinement probably comes when we start observing what is going in around us, start understanding and preparing for taking advantage of business/market/economy cycles - while not losing sight of our core skill of bottoms-up stock picking.

I daresay almost each one of us will testify that he/she has noticed the groundswell happening around financial services in the country. While it brings new challenges it also brings huge opportunity. That some of the existing and new emerging businesses in financial services space are doing well/and will continue to do exceedingly well - especially when credit cycle revives (not a question of IF anymore but WHEN) was almost a no-brainer, again.

A high sector-allocation to Financials, again can be superficially dismissed away as hindsight-bias or survivorship bias, or mutual-fund bias, or any-bias :slight_smile: - it’s actually being aware of where we are in a cycle, and preparing for it. Let’s all learn to give credit where it’s due.

Expect guys to think/share more on these lines - what are the necessary elements in an Out-performing Portfolio? How should I go about structuring it? What are the really good things to notice in this performing portfolio? How should one go about adding newer horses? What are the weak elements that should go out?

Look forward to more value-additive practical exercises.


(Newbie) #235

3 Trades with 4 stocks in last 1 year with 105% return. Wow - should provide for a great learning experience. Forget about the other accounts - why not share the Portfolio screenshot and the tradebook for this account - it will have great value for someone like me. Thanks


(Krishnaraj) #236

@Donald

So what I understand you say is (a) there are great businesses (b) great businesses give great stock returns and, the key point © if you are patient (even if not as patient as Charlie Munger) there will be opportunities these businesses will give. Strike decisively then and you will improve chances of good returns. The two examples serve to highlight that.

It’s an important hypothesis to pursue, no doubt about that.

My pokes were around pointing gaps so that we don’t get ‘fooled by randomness’.

For instance again when you say [quote=“Donald, post:228, topic:4286”]
I thought what was worth noticing was that this Portfolio constructed mostly within 2016, has 9 of the 12 businesses in the 54% XIRR Portfolio, and Gruh Finance additionally…with a 35%+ return to boot.
[/quote]

I understand it as, “if two portfolios have given great returns, isn’t it wonderful that they have more or less the same stocks”. But to me, it’s like, “if two portfolios are similar they will both obviously give the same results, it’s like saying - hey isn’t it wonderful that both our calculators give the same answer when we press 2+2”. I hope you will pardon my exaggeration to make a point. (On second thoughts, maybe you wanted to highlight how decisive this investor also was when opportunity struck. But that this was an opportunity appeared only as hindsight)

However, if the two portfolios gave great returns and were different, then we may learn something new.

I think the point made by @Vijayk on survivorship bias (or call it by whatever name) is vital to not get fooled by randomness. If you draw inferences about the past based only on today’s winners and take their characteristics to predict future winners; you have made a mistake (obvious to some and subtle to others). Which is to ignore that there may have been many losers who had the same characteristics as the winners, which you could not study because they are not around. So just by having those characteristics, you do not maximise your winning chances. The best explanation, which is not palatable to the deterministic nature of our mind, is that these things are random to an extent. In some cases to a small extent and in some cases to a very large extent. So do not get swayed by terrific returns because there will be randomness embedded in them.

Lastly, today we tout Bajaj Finance as a superb business. The same Bajaj Finance was floundering in the early part of this century.

It may be useful to remember what Horace said long long ago, “Many shall be restored that now are fallen and many shall fall that now are in honor”. Today we call them “regression to the mean”

Cheers,


(Donald Francis) #237

T[quote=“diffsoft, post:236, topic:4286”]
Which is to ignore that there may have been many losers who had the same characteristics as the winners, which you could not study because they are not around. So just by having those characteristics, you do not maximise your winning chances. The best explanation, which is not palatable to the deterministic nature of our mind, is that these things are random to an extent. In some cases to a small extent and in some cases to a very large extent. So do not get swayed by terrific returns because there will be randomness embedded in them.
[/quote]

Thanks for the elaboration on randomness. This is where I differ with “purists” like you :slight_smile:
I had warned right at the start - this thread is not for the Purists. HM says reduction of Risk and Superior Returns come from Stability and Dependability of Value. Stability of Value comes from stability and dependability of future cash flows - I am a practical guy, so we don’t talk about next 10 or 20 years / but the immediate 2-3-5 year cash flows. And stability of next 2-3-5 years cash flows come from only one thing - there are no 2 debates - it comes from the stability of the Industry and stability/dependability of the competitive position of that business in that industry.

If we work very hard st ground level and do the kind of 36o degree work in industry competition, work with domain insiders, to a large extent we are able to establish the Competitive Strategy/Position of the business - as we get familiar over 2-3 years - we can make a pretty good call on whether that Competitive Position is getting stronger or weaker - there is no randomness in there !!

Reversal to the Mean of a once superior business - is a rule of nature, yes. But to attribute all of that to randomness is neither here nor there. It happens largely due to competitive position weakening/strengthening - as a result of conscious choices made by management, in the light of industry/competitive forces. And still there are businesses that continue to defy this rule. The attempt of this thread is both to acknowledge the role of reversal to the Mean - accordingly adjust the portfolio, as well as to keep looking for those that seem to be able to defy that rule e.g. PI industries, or Bajaj Finance currently (not in '2000)

So any other result happening out of randomness - I am willing to take it on as as an equity investor - because I can’t know or prepare for it. It is best I concentrate on what can be established. Do my hard work, have great patience, and act with great decisiveness - because every year opportunities do present themselves!

Let’s focus back on the topic of this thread - restructuring a current portfolio in the light of our dynamic markets - let randomness take its course - but instead focus hard on the knowable, doable practical acts.


(Vijayk) #238

Hi Newbie,

That account was full of PSU banks. The most inferior quality businesses existing in India. What do you say @Donald about whether they are inferior or superior quality? Given the fact that my account got 105% returns in last 1 year (bought 1 year back only, I can share trade book if you want)


(Arindam) #239

The opposing viewpoints have been made - effectively. But now this is turning personal. Why is this beautiful thread getting cluttered unnecessarily. Why is it getting personal?

There are many ways to skin a cat. As is to construct a successfully working Portfolio. I don’t think Donald or anyone on this forum is saying there is only one way.

If we want to help illustrate the effectiveness of a particular style/portfolio - just go ahead and publish the actual screenshot of the Portfolio and the tradebook. What’s stopping us?

A humble request - please don’t clutter up with unnecessary jibes/pokes. Lets get back to discussing Portfolio Restructuring - and the effective ways of doing that.


(Newbie) #240

Sir please publish the Portfolio and Tradebook and explain the style/assumptions made while investing. I am sure there are things to learn from every success.


( s das) #241

WOW Brilliant . Hats off to him


(saikathalder) #242

Donald sir, Hitesh sir and other seniors. I read this thread from the beginning.
I also found this Momentum based ETF rotation - Amazing backtested results - Need Reviews

Please share your viewa on this, as technically it is a very good idea, but I am not sure, why no one is follwing that thread and also I want to know if any senior is following such strategy long term…


(Donald Francis) #243

H[quote=“vinoths, post:227, topic:4286”]
With current market situation, most of the stocks listed in your portfolio are expensive. Two common approach is,

a) Wait for good amount of market correction or black swan event to build such portfolio. Sitting with “Cash” when market is extremely valued is also important practice / behavior. I have failed to follow this multiple time :slight_smile:b) Use SIP method by weekly/monthly basis to build the portfolio over next 6 months to one year

Can you share your thoughts based on current market situation and timing to build the portfolio?

Regards,Vinoth
[/quote]

As you rightly mentioned there are 2 key attributes - Patience and the Firepower (to Strike)

  1. Firepower
    In continuously rising markets like now, I have found this becomes an easy job. Every few months some businesses become richly valued or keep getting valued higher -
    Allocations jump from 15% to 25%+. There is only one option in such cases - continuously trim - I do these in tranches of 10%-20% at a time. Canfin, Avanti Feeds are examples. Core Portfolio Holdings like Bajaj Finance, Shilpa, PI I will give a longer rope, trim that much more slowly.

Once we understand the importance of having Cash, this becomes second nature. Mr D’s dictum to me was - in any stage of the Market you should have 20% Cash (near Cash). I took it as a Gospel. So I am always underinvested. I always have my Consulting income cashflows buttressing my fire-power all the time. Each one of us can work out how to maintain firepower at all times (based on individual circumstances), once one appreciates the importance of Cash - being King!

2.Patience
Has more to do with individual Temperament, and also understanding the Work Ethic required to remain Contented - with what you have :). When one has spent 4-5 years, I think Patience is also an Outcome of understanding oneself better, knowing what works for you and why. KNOWING what you are looking for and remaining true to PROCESS will help in developing patience.

Role of Contentment in developing the right Work Ethic - If temperamentally we are always jumping around/salivating at the next opportunity, we cant remain unaffected. No one is a super-human, so it pays to avoid too many temptations. Not getting easily excited - being very CLEAR about what excites you the most. Working hard only on that excitement - helps keep out lot of temptations (NOISE).

Also the real appreciation of the miracle of compounding helps. Appreciating that Compounding results are back-ended. 20% compounding over 10 years is 6x but in 20 years in 36x, and in 30 years?? Even a 15% compounding is 64x in 30 years. provided you can do it consistently. Patience is key to Consistency, Sustainability, and Longevity.

SIP in good businesses is workable - provided one is clear about Value/Margin of Safety. Else, it can be hazardous in a continuously rising market. Only one Secret to Outperformance - consistently UNDERPAYING. Michael Maubussin - I like his very practical thoughts - says Value and Competitive Position are joined at the Hip. If I take HM’s Reducing Risk through understanding Stability and Dependability of Value as a Gospel- I take Maubiussin’s this statement dead seriously too.

I can get better at understanding Value - only if I get better and work harder at understanding Stability of the Industry and Competitive Position/Strategy of the business in the Industry.

Became a big sermon :wink:. Didn’t mean it to. Hope something in above resonates with you and help in formulating your own responses to a simple but difficult job.


(Value Seeker) #244

I looked at the trade book (only from Nov’16 - Current). My reason for this was (1) to take a small subsection to see if I could gain some insight, and (2) I am intimately familiar with this timeperiod as I was waiting with my “dry gun powder” for the US election results. That demon happened was icing on the cake. :slight_smile:

Now, as noted by various people obviously there is always a possibility of hindsight bias, creating a reason where none may exist. That said, one thing I found missing to get a 360 view of understanding was - what is the overall rationale of the person building this portfolio i.e. returns apart, what is the timeframe, what sort of businesses this person wants to invest in, what is the understanding etc… Without some context around that it will be difficult to say if these moves are opportunistic/ speculatory or truly driven by VP type “separating wheat from chaff” hard work, analysis, and insight (i.e. patience + decisiveness after understanding the underlying business economics)

I did this exercise for my portfolio and it was eye opening. It clearly brings out some learnings, biases, and decision making patterns and gradual (hopefully increasing) maturity ;). Highly recommend this analysis to everyone for their personal portfolios.

Thanks @Donald for persisting and driving this despite naysayers…


(KKP_Investor) #245

Just a phenomenal combination and very potent. 500x is totally believable from 2000 to 2017. I am also holding many stocks from th 1980’s and 1990’s that have given some great returns, but not the entire portfolio is up more than 400% which is 4X in the same timeframe.


(Donald Francis) #246

Have received many cautionary notes from well-meaning senior friends - on newbie folks taking this Portfolio sharing exercise too literally, and getting swept away …

My intention was just to drive home the point on - realisable performance aspirations.

While its good to see such 54%+ XIRRs record over 6-7 years, let us also see this in the context of a continuously rising bull market. The same Portfolio a year earlier or two earlier may have looked like a 35%+ XIRR. And in all probability this Portfolio/Style of active investing with consistent adherence to Process, is probably likely to moderate down to 30-35% XIRR, in most cases. For gifted-outstanding individuals though, there is no bar!

I think every hard-working active investor should at least aspire for 30-35% CAGR in Indian Market context. Let’s not dumb-down aspiration levels with “randomness”, or “reversal-to-the-mean” kind of quotes.

I see many of my good friends - stuck with an aspiration level/contentment level of 15-20% compounding. The whole attempt was to drive home a single point - that if 15-20% compounding is the aspiration level at this stage of India’s economy - one should just invest in HDFC Bank, Nestle, Asian Paints, Bajaj Finance …and the like, and be content! That would serve the purpose beautifully. There would be no need to work so hard at finding newer horses that can also run stronger, faster perhaps.

15-20% Compounding in Indian Market is under-performance in my book. Any logical investor using common-sense with good dose of patience can achieve that. It’s just my view - and I cant help being upfront about it. Those who do not agree - let’s agree to disagree.

A request to everyone - this post is just for the record. Please DO NOT RESPOND to this post - and clutter up this thread. There are more important things to focus on.


(Donald Francis) #247

Let’s bring attention back on the object of this exercise, again - Restructuring for risk-adjusted, all-weather performance.

If we take this statement of HM seriously,

In my opinion, the key to dealing with the future lies in knowing where you are, even if you can’t know precisely where you’re going. Knowing where you are in a cycle and what that implies for the future is very different from predicting the timing, extent and shape of the next cyclical move. And so we’d better understand all we can aboutcycles and their behaviour - as different from predicting the timing!

How do we take it forward? How do we take advantage of understanding what is going on now in our economy, while aligning our core expertise of bottoms-up stock picking? Can we prioritise our search for the new stronger horses in a few areas?

One way I see is to acknowledge what is going in now is this trail of thought. Inflation is low or kept under control, interest rates will be low for some more time, currency is appreciating or stable, not in depreciating trend. What sectors will do well now is what we need to evaluate and zero in. (a la Prashant Jain, or most discerning senior friends, who give credence to market/business cycles).

We at VP are traditionally weak at this.
A good way to become more acquainted with this way of thinking is to study lessions from History - in Indian Market, and Global context.

When was the last time we had inflation low or under control, interest rates low and stable, and currency stable or appreciating, not depreciating? 2004-2008?? Can we not gain valuable lessons from that hind-sight study.

I think we can, and am excited to learn in this area, where I am a complete novice. Again it’s important to be aware of the differences. 2003-4 valuations were completely different. World situation was very bullish, not grim like now.

As they say history may rhyme, it may not exactly repeat. If we have a decent size crash by end 2017 or mid 2018, there may be good parallels.

Whatever be the case - one cannot but agree with HM if you are a discerning investor - we’d better understand all we can about what is going on around us - about cycles and their behaviour.


Saji's portfolio
(Saji John) #248

Thanks @Donald for the categorization approach in planning for restructuring pf. I tried to do that for my stocks. Please correct me if I am wrong in any stock assumption. Looking forward to your suggestions and comments Saji's portfolio


(Amit Aggarwal) #249

Thanks @Donald for taking efforts as always and helping investors scale the learning curve!

I am not very clear when you mention “Secular crash Pre/post next peak”. Also, what should be the rationale to exit “Steady Compounders” during a crash ? Why should we not continue holding them ?