Yogesh's blue chip 10 Portfolio


(Yogesh Sane) #1

Here’s a portfolio of exclusively blue chip companies.

Criteria is very simple.

  1. Only blue chip stocks from Nifty 50
  2. Only 10 stocks
  3. Each stock will be between 5% to 20% of portfolio.
  4. Easily recognizable names requiring less research and monitoring

Process is also very simple.

  1. I categorize Nifty members as Enterprising or Defensive. Enterprising is the one that is likely to benefit from economic growth and improving investor sentiment and defensive stock is the one that will survive a slow down or risk aversion.
  2. Take out many PSUs or companies that are too volatile or cyclical or heavily leveraged.
  3. Take a contrarian view on the economy or market. When consensus is growth, overweight defensives and when consensus is slowdown, overweight enterprising
  4. Annual rebalancing. Avoid short term capital gain tax and minimize churn.

This portfolio generally outperforms Nifty 50 by 4-12% each year and has produced 20% return over last 10 years. This portfolio never gave me sleepless nights or even shock and awe.

This is a portfolio that I have recommended to my senior relatives for the only reason that names in this portfolio are easily recognizable. They are most comfortable with that. When a stock goes down, they blame the company, not me :slight_smile:

My actual portfolio (of mostly large and mid cap stocks) outperforms this one but requires lot of research, monitoring and has periodically gave me shock and awe. Over time, as I would like to spend less time managing portfolio (and enjoy the return on the portfolio), I will be moving this strategy.

Comments are welcome.


If 25% CAGR is your goal, why not buy this index?
Investing Basics - Feel free to ask the most basic questions
(Alphin) #2

I am really amazed by your simple yet effective investing philosophy. This portfolio is something that someone can easily follow buffetts buy and hold strategy and compound over the long term.

One thing I noticed is that apart from TCS. All the stocks are providing something that we cannot live without, hence no matter what the economic outlook these companies will be there even after 20 years.

This is a very good perspective from the normal valuepickr aggressive portfolio. Would love your yearly or 5 year period return comparison between this and your actual portfolio.


(Yogesh Sane) #3

Thanks for your feedback. A few points I would like to clarify. This is not a buy and hold portfolio in the strict sense. I bootstrap this portfolio every year i.e I rebuild this portfolio from scratch every year to avoid attachment to winners. Buy and hold is required in US because of tax on long term capital gains. In India we have the luxury of tax free gains after one year. I have the benefit of rebooting my portfolio every year without sacrificing returns.

My actual portfolio consist of these companies plus few mid caps that I can’t resist buying. My actual portfolio beats this one by about 2-3% per year but has higher volatility so not sure if adjusted for risk if I would beat this one. I also need to keep digging for information about my mid caps. Large caps are covered by newspapers so my daily newspaper hour is all the research I need for large cap portfolio. Since I am in my slogging years, I wouldn’t mind extra efforts in exchange for the extra returns. Also my actual portfolio satisfy my craving for activity :slight_smile: . This is more like a retirement portfolio. Performance of this portfolio was a surprise to me as well since most investors have the notion that large caps will not grow fast or will not give high returns. That’s why I am targeting this strategy as my low maintenance investment strategy for retirement.

The big difference between this portfolio and actual portfolio is degree of concentration. I am skeptical of investing more than 10% in a mid cap but wouldn’t blink with a large cap especially if the company is either a number 1 or 2 in it’s industry.

About TCS, they do things that are absolutely essential for daily operations of fortune 500 companies.


(Yogesh Sane) #4

Adding reason column


(us121) #5

I am die hard believer in creating assets which with time becomes more and more maintenance free. As such this mostly becomes a need as we grow in life, career and move towards higher age. More from the intent of it leaving us with enough time to do something more meaningful and especially when we do not have financial resource constraints.
However, just one point that i have is, even small and mid cap company once we study and track continuously for few years - quarter after quarter, essentially they also enter in to maintenance free category. This is subject to we enter in only those company which we expect to sustain for long long period. And if that turns out to be true, than the need for giving our time to such companies is very small as we need only marginally incremental information and not rebooting the information which we possess as we follow the same for few years.
Now you may have question, why at all to take this pain with small companies. The answer is to benefit more from volatility from these company prices as people still go by news papers and so called research reports only even for these companies and they have no clue on how to connect the dots over a long period by studying such companies.


(Nitin) #6

Really good portfolio.


(Sameer Wakude) #7

Thanks for sharing. I have been itching for this kind of portfolio, and to giving up the large cap MFs.

I downloaded all the data and applied following filters (Source Value Research):
RoE > 20 and
Debt to Equity < and
Cash flow > 0 and
5 year returns > 0 and
Price to Earning < 35

I get the below:
Hcl
Tech Mahindra
TCS
Aurobindo
Hero Motocorp
HDFC
Sun Pharma
ITC
Maruti
DRL
Bajaj Auto

I intend to do SIP in this folio.


(Yogesh Sane) #8

Your portfolio is mostly concentrated in IT, Pharma and Auto. While these 3 sectors are not correlated with each other, a drop in one company in the sector will generally result in drop in other stocks in the same sector. In general, a diversified portfolio can be created by picking stocks from 10 sectors as classified by Morgan Stanley Global Industrial Classification System (GICS).

There are many ways to classify companies based on business activity but from an investor perspective, a defining criteria is low correlation and GICS is designed specifically for investment community.

10 Sectors in GICS are

A portfolio that has a member from at least 7 to 8 sectors is generally well diversified even if if has only 8-10 stocks. A portfolio chosen from a screener generally share many common attributes and may not be diversified.


(Sameer Wakude) #9

Thanks for sharing. That was informative as well as enlightening :slight_smile:


(Yogesh Sane) #10

Investing in a small cap and watching it grow into a large cap is the holy grail of investing. However, just because you are tracking a small cap company it’s not going to become a large cap company or even become a better small cap company. What if you keep tracking a company and you realize that it’s fundamentals are deteriorating? Will you continue to hold on to it just because you have been keeping track of it?Many people actually do just that. They don’t want to take the pain of replacing it with another one and take efforts to track a new one. They continue to hold on to a company they have been tracking. This behavior is so common that there is a name for it. It’s called familiarity bias. Unknown enemy is not necessarily better than known enemy. If ignorance is bliss then it can be very costly.

Only a small number of small cap companies grow into a mid or large cap companies. A small cap company is more likely to die as a small cap than to grow into a large cap. IMO, investing in small and mid caps requires much more efforts than in large caps. Unless you have an edge in keeping track of small companies, efforts are much more than than returns.


(Karan Sharma) #11

I think a market cap wise segregation is wrong. Pricing also matters. A large cap bought at astronomical valuations might do the same to a portfolio


(us121) #12

You are absolutely right on both count: one just by tracking them, they do not become large cap and also the familiarity bias.
Tracking starts only after lots of pre-work and hence they are lower single digit in numbers.One more reason for that is we needing an edge to understand that business. hence large number of them get killed in the first filter itself before we take the tracking position.
On Familiarity bias, yes i had been the victim of that bias earlier. but no more now. Once i understand that i do not want to take good position in the stock, i generally move out fully. infact, there are two positions i vacated last year in small losses in one stroke.

Small Cap/ Mid Cap are risky bets and hence needs a lots of discipline both on skill and behavioural count. fully agree with you.


(us121) #13

Yes, Sir. Bhav Bhagwan hai. hence what ever knowledge and insight we may have if price is not matching my equation, no point in taking entry be it any cap for that matter. As is well said, we initiate profit in the stock from the entry point. And hence this discipline is must to understand a fair price prior to making the entry.


(Yogesh Sane) #14

Large caps are generally well tracked and well understood by investors so they generally do not trade at extreme valuations (both high and low). There is a low chance that you will have to pay an astronomical value or get a very low price for your investments in large caps. There is a good diversity of opinions about these stocks that keeps the price in check.
Mid and small caps suffer from lemmings like heard mentality. once the stock gets a momentum, there is no stopping it from reaching extreme levels in either direction. You are more likely to be sucked into buying an overvalued small cap or panicked into selling an undervalued small cap than a large cap.
Having said that, small and mid caps grow faster and often ride on emerging trends in the economy. Hitching your wagon a growth engine of a small cap can be very rewarding as long as you don’t derail.


(Arun S G) #15

It’s quite a fallacy to think that Large caps do not provide opportunities at extremities of valuation. These generally happen at times of panic, or market downtrends and they are much more frequent than one imagines, and the swings are also much larger than one thinks. Here is the High & Low data of a few large caps in just 52 weeks.

It is perfectly understood that no one can catch the bottom and no one can sell at the top, but it is also true that there is enough margin in above table to make a healthy 20% in 52 weeks. These swings happen year after year, less in some years, more in some years. When the markets go into bear market, would you be rather left holding an HDFC bank, or a midcap bank? Buying the large cap at, or close to a 52 week low provides that additional margin of safety, and buying at a multi year low, that much more safety.


(Nishant Kandoi) #16

Hi Arun,

Your point is valid. I guess what Yogesh was emphasizing was in relative terms. I am pretty sure that the table above will have even higher variations for small caps.

Also, if one is buying the blue chip stocks, he or she would probably be buying it for long term. If you manage to buy at middle of the 52 week high and low, the %percentage difference between best bargain price and your buying price will wash out in the long run.

Regards


(Yogesh Sane) #17

Arun,

You have a very valid point. Large caps do experience a big price swings as illustrated by your table. Small and large caps have the same swings (may be more). That’s just the market risk all investors face.
My observation is that whenever large cap stock move up or down, there is usually an explanation for that move (not necessarily the correct one though) compared to movement in small and large caps. There is generally good coverage by the media, company generally comes out with come press release (especially if it an up move) and brokerages cover it as well.
That enables investors to make an informed decision especially to assess if the market is overreacting or being rational in its response.
The most troubling part of small caps is usually there is no immediate explanation behind big moves. There is lot more information arbitrage here. I am sure those who are trading the stock know something that others don’t or may be it’s just order imbalance or manipulation.
When a stock like HDFC drop 20% from high, other banks drop 40% from high. Same story for other sectors and same degree of movement in other direction as well. I have been following a strategy to switch from large conservative stocks to small caps as the market goes down and switch to large caps as market moves up. That way I stay in the market all the time and avoid timing the market while generating some alpha from the relative move.


(Arun S G) #18

There are two separate points above:

  1. Comparison with mid-caps: Of course Mid caps will be more volatile than Large caps, but a larger number of mid-caps also will keel over and never recover. Information differential is one aspect of the mid-cap/large-cap story, but there’s also the fact that a smaller percentage of mid-caps recover than a Nestle, or a Sun Pharma.

  2. @nishantkandoi - No, buying a large cap when price falls 50% is not necessarily for long term, though that would work well too. It ought to be like what @Yogesh_s says above, bootstrap it once price target is reached. While this sounds dangerously like trading, this is actually pure value investing - Buy low, sell high. Growth investing on the other hand is buy companies for growth and hold on forever ( ideally). Hitting a 50% on a large cap per year sounds easy pickings, but in reality, it only happens when the market is in fear and one has the gumption to buy when everyone else is fearful! The other half of the coin also needs to be played out - sell when everyone else is greedy :slight_smile:. Investing in Growth stocks/Midcaps on the other hand is to buy, and hold till the growth plays out, in the strategy above wrt large caps, the holding period is only till market overcomes temporary fear.

Another obvious, but important point of investing in large caps is - how much of one’s wealth is one willing to invest? How big a bet can one make? If one hits just one stock a year at 50%, how much capital allocation is one willing to make? This makes a huge difference in the results. 50% compounding for even a few years can yield extra-ordinary results!

@Yogesh_s is already implementing this strategy of buying blue chips and refurbishing annually so nothing new here. I recently started on this journey of investing in large caps at discount. My learning, and stomach still needs to improve on allocation of capital :stuck_out_tongue:

Cheers,
Arun


(csteja) #20

Have you shared your mid/small cap portfolio ?


(Yogesh Sane) #21

Here are my Mid and Small cap picks

Mid -
Indiabulls Housing Finance
PI Industries
NMDC
Bajaj Finance

Small -
APL Apollo Tubes
Kovai Medical Center & Hospital
Nesco
Avanti Feeds

My mid and small cap positions change more often than large as these are volatile. I also follow a strategy that if I am not willing to buy a stock at the current price then then I am not willing to hold as well.