Whats your rationale in picking recently listed PSP Projects?
“Be fearful when other are greedy, and greedy when others are fearful” - WB
The question of correction (or crash - which I’m betting) is “not if, but when”.
Timing the market is next to impossible, and many well known pundits are
as early as 2 years, when it comes to predicting the crashes.
At the end of the day, as WB used say:
“Rule #1: never lose money”
“Rule #2: never forget rule #1”
Note: this is not investment advise nor I’m investment adviser. My views could
be biased as I’m short on NIFTY.
No you are not. Anything that helps you sleep well at night is not an overreaction. There is no point in investing in companies that you think are overvalued. If you find something that is undervalued you can always deploy that cash or you can wait for the next correction which can happen in anywhere from 2 days to 2 years but it will come.
A note of caution though. The stocks you sold can continue to go up and the resulting regret can turn your fear of losing money into fear of losing out on making money. As long as you can take care of that, you are OK.
Blue chips is a good place to start as you don’t have to worry if the business model is sustainable. But with blue chips, you need to get your valuation correct as that will be your only edge. You also need to think like a contrarian.
Here is quick write up of items at the top of my head
- High ROE
- Good cashflow
- Low receivables
- High cash on balance sheet.
- Growing business.
- Good margins compared to peers.
- Small scale
- High valuation
- High dependence on founder.
- high working capital requirement.
I will create a thread once I get all the facts in one place.
@Yogesh_s Thanks. Very well articulated and good advise on when to deploy. Will carefully wait for an opportune time and have started studying the Blue Chip Road.
You are right; I do hear of a few with regrets, fortunately I don’t seem to feel them… as yet at-least.
@Lotus That I have on my wall. Rule # 1 and Rule # 2. How much ever money may be made is never a valid reason to lose any of it and honestly the fearful and greedy plays out like a charm again and again.
Guys, thanks for the responses.
Hi Yogesh, can you please elaborate this? Does this mean that you completely exit from a stock after a year? Thanks
Every year I look at the Nifty 50 companies to find the 10 best suited for the next one year. This selection does not depend on what’s in last year’s portfolio. Since long term capital tax rate is 0, there is no tax incidence for selling stocks after one year. Many times, a stock stays in the portfolio but the weight changes.
This is not my real portfolio, this is a portfolio that I have recommended to my senior relatives but I am planning to have a similar portfolio myself in few years so this is an exercise that I think will help me in future.
That’s very interesting. But isn’t this practice difficult to adopt in the real world?
Let me explain why.
The stocks in your portfolio - in all your probability- will have different date of purchase spanning over a year. So one stock may have been bought in April , while another 3 / 6 / 9 months apart (an investment for a year would have been spread over a year after all). Now, if you want to save the capital gain, you have to keep it for at least one year. When you review your Portfolio annually (say in April every year) you find that 4 out of the 10 existing stocks need to be replaced. Assuming that each of the stock was bought in one go and not in various tranches, there might be different months when 4 stocks would be eligible for the capital gain exemption (say April, July, Oct & Feb).
Now, would you keep on waiting for so long to get out of the stock that does not fascinate you any more?
Surely, there is something I am missing out here.
No. Rebalancing happens every year and all transactions are done in one go. Idea behind this strategy is to have a low maintenance portfolio while still being actively managed and not just invest in a mutual fund or PMS.
With annual rebalancing, I want to avoid having to track the portfolio weekly or monthly and make constant buy/hold/sell decisions. That’s the reason I am choosing only blue chips because their fundamentals aren’t likely to go from good to bad in a single year. Moreover, someone is doing the job of shortlisting 50 best companies in India for me and updating that list 2 to 3 times a year. That takes care of 90% of portfolio management work. These are all well known companies with enough research coverage so studying these companies is not difficult.
Call it a Concentrated Nifty portfolio. Overtime, market will become efficient and mutual funds and other professionally managed funds will have a tough time beating indexes.So an actively managed concentrated portfolio with little churn and a contrarian bias may beat indexes. That’s the theory that will be tested over next few years. Such a portfolio will not generate 30-40% returns but it can generate 15-20% returns without much risk.
Great point Rajneesh. I totally agree. No one is going to buy all the stocks on the 1st January. The entry time in different stocks will surely vary.
A very interesting approach I must say. Rebalancing the complete portfolio in one go is not an easy thing to do, at least for me. However, as Yogesh has mentioned it can be done after a thorough research and knowing what you are doing. Shows how much time and efforts Yogesh must be putting in his annual ritual.
The only thing which I am concerned about is, one may be overpaying for some stocks with this approach, even for the high quality blue chips. But then, he would also be underpaying for some stocks. So, perhaps it all evens out in the end.
If true, this is amongst the most brutally unbiased unemotional ways of managing a portfolio I have come across.
That day could be the dividend record date, great quarter ending results day, bonus record day, demerger record day, for any 1/2/3 major portfolio holdings etc etc
Quite hard to imagine why anyone would want to miss out on some no-brainer excesses just to follow a particular rule.
This is a low maintenance portfolio. Anyone who believes in long term investing and want to hold stocks for years should not be surprised with this strategy. this is a strategy not a rule. Idea is to build a long term portfolio of strong companies but review the portfolio yearly and make minimal changes to make sure the portfolio continues to have companies with good fundamentals and fair valuations. Portfolio is reviewed once the annual reports are in. Typically in Aug-Sep period.
By spreading the transactions throughout the year to take advantage of the volatility, you are essentially trying to time the market and that hardly works in the long term. Volatility can play against you as well. But more importantly, trying to time the portfolio rebalancing essentially involves monitoring portfolio throughout the year and that defeats the very purpose of creating a low maintenance portfolio.
Nifty 50 gets 4-5 new names each year. Rest of the companies are same. All I have to do is see if the story has gotten better or worse and if valuations are still in line with fundamentals. More often, only the weight of a stock changes and only 2 to 3 stocks are totally replaced. so there is not much churn. I don’t actually sell everything and buy everything back. I only do the delta adjustment. The only difference is every year I rebuild the portfolio as if I am starting from scratch.
Good morning. I have been following this thread with interest. The clarification - that only 2 to 3 stocks are totally replaced is what I was looking for! You mention it as low- maintenance - but I can still see a large amount of work going into it. You did say that you had help - analysing it. Lots to think about as a strategy. Would it make sense, for someone who needs a higher annual return, to use the Midcap Index instead of the Nifty 50 to pick stocks? If this sounds naive its because I am very new to investing and would appreciate advice re: strategy. Thank you
Small and Mid cap stocks over longer term perform as much as large caps. These indices outperform during bull markets and underperform during bear markets so over a market cycle they end up doing as much as large caps. they also have higher volatility than large caps so on a risk adjusted basis, these indices underperform large caps. In India, there are large number of small and mid cap stocks so for an active stock picker, this is a great area and a well chosen portfolio can earn 30-40% CAGR thus far outpacing any index or mutual fund.
Nifty Next 50 is the only index that has generated returns higher than Nifty 50 without much additional volatility over long periods. So that will be a good index if you want to build a low maintenance portfolio and generate higher returns. These stocks have stability of large caps and growth of mid caps so a good place to start.
Good morning. Thank you so much for clarifying this so promptly.
Yogeshji, have you looked into doing the same picks but doing it when the P/B and P/D ratios are favorable also. This will give you a measure of undervaluation. Indian stocks do not have consistency in dividends but the inconsistency is also good since it is giving larger dividends when the business is good and smaller when business is bad, unlike the dividend system in Westernized nations where growth in dividends, and long term consistency of paying is MOST critical.
Also, doing filteration of stocks through one of the screener sites is great, but the issue is that you will run into change in names constantly and therefore the SIPs have to stop and restart with a new company. The only way you can do SIP into a screened list of stocks is if your criteria for Screening has a Buy Screen, and also another Sell Screen. Both screens have to be run, since the Sell Screen might tell you to unload the SIPped stock and save you from pain. BUT, but,it will now generate taxable transactions, a lot of tracking of stock buy and sells (yes there are programs available), but all of that becomes a chore that one has to do at tax time.
Both strategies above are great, but have their own merits associated with it.
My recommendation is to find out how you are ‘creating wealth’ first. If you have a busy full time job, go with a simple stock market strategy of annual rebalancing, and let go the zhanzat and complications of buy / sell / SIP / Un-SIP etc. If you are making money, saving money, and doing it consistently from job / business, that is MUCH MORE important and fruitful than managing the wealth, since the imperfections in Wealth Management will get made up plenty by job income.
Just my 2 cents…
My question here is " Would a portfolio perform much better than Nifty 50, if I just exclude stocks that are dragging it down.?"
Consider completely excluding stocks of following sector:
PSEs, Energy, Power, Mining, and Politically connected.(Zee, Adani)
As these are very unlikely to give better than Index return over a long period, because they are the ones that drag it down.
What I am left with is, Banks, Pharma, IT, Auto, Asian, and ITC.
Assuming purchase is done when the Index of Nifty 50 corrects 25%, and stocks are sold around next bull run?
No. That would be driving by looking in the rear view mirror. Often, stocks that are a drag on Nifty in one year turn out to be the ones that lift Nifty next year. Your selection should be based on expected returns and not realized returns.
This is market timing and allocation between equity and debt (or any other asset class). Allocation is separate from security selection. If you can time the market that well, you don’t need to worry about a selection strategy.
Thanks Yogesh. Very interesting insights on how to manage the PF without much churn out. Just wondering would Nifty Next 50 could be a great starting point to create long term PF. If so, how many stocks would you recommend?
Additionally, can I know any recent updates on your investment in midcap and small cap space.
Lastly, great thanks to VP 2017 investment journey slides. I have been really impressed with your thought processes and I strongly feel that my whole approach to investment is going to change in a better way. Thanks again