2008-09: Large Caps saved You/Small & Midcaps crushed You?

Investing Strategies
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I always have had typical luck - what I call beginners luck!

I have come to believe if you are very earnest in what you want to achieve, you are passionate, sincere and willing to put in any amount of hard work - not adopt short-cuts - Beginner’s Luck favours you:) Nature conspires to arrange things/situations/people around you so that you prove lucky!!

2005 -2008: 1st Beginner Phase

2005, I started my serious investing journey. I had read the most famous Guru Books and decided to put some money in the market. In April/May 2005 Market had crashed. Reliance bros were fighting, Airtel (I was from the Telecom industry), L&T and BHEL seemed sure bets, Infosys (I had latched on in 2000 just on hunch), ITC had been growing at 30% for last 10 years (I figured people will keep smoking cigarettes), Cipla and Ranbaxy and Dr Reddy’s formed the Rest of the buys. I bought gradually, slowly, as I tried to understand ratios, numbers, behind the business success.

Needless to say these did very very well - in the next 3 years till 2008 - I had several 3x-4x to bigger baggers. I thought I knew it ALL:) Probably Midcaps provided much bigger gains in the 2003-2008 timeframe, but I was blissfully unware, away from all the NOISE there.

Come 2008, I knew things were drastically overvalued, but didn’t know how to sell, what to sell - I didn’t have a model. Nobody I knew could give me satisfactory answers. So I stayed PUT, through the entire 2008 debacle and the subsequent recovery from mid 2009.

As I got to know more folks fellow-investors in the market , I realised I was one of the few** who had not got burned **even though I stayed 100% invested. I was foolish not to have booked partial profits and created some physical assets (that’s what the savvy guys do at the peak of the boom cycle, now I know). My portfolio was still 10-15% up even after the massive meltdown form 21K to 8K.

Beginners Luck at play! Now I know! Had I been in small and midcaps then in 2008-09, I also would have been butchered. Even if I wanted to exit (say I got the timing bang on) I wouldn’t have been able to exit in a hurry without huge impact costs - many of these are low liquidity stocks. And when there is a big big secular fall, the small and midcaps get CRUSHED in no time, the Large Caps take more time and are gradually hammered, and don’t get beaten down beyond a point - if they are the typical blue-chips. Many serious investors I got to know subsequently, were invested in small and midcaps, and they all had 70% CAGR records in the heady 2003-2007 boom period! Not all exited completely, some really could do that perfectly, too. Those that didn’t exit fully got CRUSHED. Some of them saw 90% erosion in Capital.

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2009-2012: 2nd Advanced Beginner Phase

Ayush got in touch with me in Dec 2008 (after my “Opto Circuits stock research” report - search for it in quotes, as shown - its still no#1 in Google search, India). We did a few stocks like BKT together and I got hooked. Ayush converted me (patiently helping me get over my theoretical but stubborn objections) completely to the undiscovered beauties - strong differentiated businesses - but small, mid and even micro-caps.

To invest in these gradually I had to sell some of my legacies. RIL and Infosys I would sell a bit and buy a bit of BKT, and Manjushree. Then came along a classical-textbook-perfect stock like Mayur Uniquoters - Naga made the first trip to Mayur in early 2010 - the second or 3rd Management Q&A (after Opto & Manjushree) - I decided to allocate more capital.

In 2010, Mr D and Mr M helped me formalise our Capital Allocation Framework, distinguish between businesses, know which is your best stock and next one, and the next in order of priority- and why? They gave me a very simple & clear SELL framework )- if the business cannot compound at 25% CAGR for next 2-3 years, and you know some others that can, it’s a big opportunity COST - GET OUT - no matter how many double-digit-x they might have given you. I finally could sell without hesitation - my legacy beauties - stocks that I had fallen in love with - it took me 3-6 months to divest (I still retain small numbers of a couple of sweethearts:))

My Portfolio shifted decisively to small & midcaps! **Again beginners Luck at Play!**with perfect timing! Post Diwali 2010 till now, in the uncertain economic environment, with high-inflation & high-interest rate scenario - Large Caps/Index businesses (where the positives are always built into the price, not the negatives) have been suffering big, but strong small and midcap businesses (with zero debt, good growth visibility, dividend-paying, non infrastructure, non-telecom, non-power, but undervalued) have done extremely well. **Somehow again I was just in the right stocks at the right time. **Was I knowledgable enough and understood everything I did and why, certainly NOT!!

2012- 2015: Consolidation Phase

I can no more be considered a BEGINNER perhaps. I have to start paying my tuition forward. Beginner’s luck will no more be applicable. I have learnt some of the ropes. have to up the Learning curve. And help other beginners learn - all that we have learnt - faster.

ValuePickr is that initiative - to make everyone better-informed Investors. To provide newbies with their beginner’s luck:) - access to collective wisdom of the seniors.

The first thing I realise is ValuePickr Portfolio is lop-sided at the moment. It needs to become more balanced. To have some in-built protection for all phases of the market. It is working fabulously at the moment - how long it can run on these breed of dark-horses, we don’t know. It needs to have some of the thoroughbreds for a better safety-net, even if it means sacrificing higher growth. Because when exactly a different type of market comes into play next, we may not be that smart in identifying; we may not be able to switch allocations to the right kind of stocks for that market, in time or without heavy COSTS.

The thoroughbreds work in all types of markets (the downsides are extremely low) - are we talking of a Nestle, an ITC, and HDFC here. They might not give you 60% CAGR ever anymore, but they sure do give you a 20% plus CAGR over any 3-5 year periods. Time to be picky about the real real thoroughbreds though, can’t afford any pretenders:). Thoroughbreds with REAL MOATS & REAL PRICING POWER!

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Think that Our Capital Allocation Framework has to be tweaked NOW, from the Safety-Net angle (designed to work smoothly w/o big hiccups, small 10-15% downsides in a secularly bad market are perhaps par) to serve us better all-seasons, all-weather!!

Big expectations! Yes! Can it be done?I am pretty sure now is the time to harness the combined Intelligence of ValuePickr Community.

Invite everyone to please comment freely.

Additionally, I will of course be seeking the guidance of Mr D, Mr M, Mr J, and Mr S (a new Mentor who has lived the ecstacy of super-investor status, has endured the pain of big erosions, and now in his more matured avatar, poised for the KILL) to capture back their wisdom into this discussion, and into our Capital Allocation Framework.

-Donald

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Wow Donald!

It wasexciting to read your short"investment autobiography", just gives me a feeling that you are destined to give something big to the investment community than what we have seen so far.

I am also a firm beleiver of forutne favoring the brave…and in your case probably not just brave, but humble and keen to “give”. I hadnt fully fathomed your passion to “give” until I met you the second time and till I read this - I am sure the universe will conspire to increase your “luck” and through that the “luck” of lots of potential retail investors.

Keep going

Vinod M S

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Thanks Donald for that brief… some lesson for me to learn from this.

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Wow Donald

Excellent â.

One thing worth praising is your acceptance of luck element in being in large cap and mid-cap at right time. Ofcourse skill plays a significant role, but there is luck too. In the last month of the year, I was re-reading some of the books which I love most. What a co-incidence that even I was thinking on the same line, as to how to weather all type of market successfully. I realised that currently my portfolio is totally tilted towards contrarian bets (ofcourse they have narrow to OK moat) which will take 3-5 years to play out and they are cyclical too. So what I start getting worried what if the recovery takes longer than the historical norm. As I have completed one year in my independent investment journey, before committing additional funds, I decided to work on how I would like to set up my portfolio. I will share my thoughts in next few posts.

Few days back I sent the below mail to one of my friend on the importance of diversification across market âcap.

***********************************************

Hi

I was reading "A Zebra in Lion Country" by Ralph Wanger. In one of the section he insists about importance about diversification across market cap. I thought it might be of interest to you....

For reason no one has satisfactorily explained, small-cap stocks go through cycles of investor favour. When people comment on the health of âthe marketâ they mean the Dow JonesIndustrialor the S&P 500 Index. The chart of the patient in the next bed â that is small stocks may look quite different. There are really two distinct markets, and their fortunes alternate.

Period

Large cap

Small cap

1963-68

Underperform

Outperform

1969-74

Outperform

Underperform

1974-88

Underperform

Outperform

1983-1990

Outperform

Underperform

Sure, you can pick small cap stocks that do well no matter what style is in vogue, but itâs harder when you have to swim against the tide. And you are more likely to be faithful to aficklemarket if you are getting satisfaction from some part of your portfolio at all times. Style diversification, too, is smart policy.

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This is another mail on the same topic which I sent to one of my friendâ

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Recently I was re-reading Peter Lynch âOne up on the Wall Streetâ and came across something, which insist exposure to stocks from various categories. I think when he mentioned that cyclicals can give multi-baggers when invested at proper time and price, indirectly he was insisting on being aware of cycles.

Here is the extract from the book

*********************************

Spreading your money among several categories of stocks is another way to minimize downside risk. [I think this also increases your chances you getting multi-baggers]

Categories

Risk

Possible return

Allocation

Slow Growers (no growers)

low

Low return (div yield)

10-20%

Asset Plays

low

-10% to 5x

Bal (not clearly mentioned)

Cyclicals

High/low

-90% to 10x, depending up timing the cycle

10-20%

Turnarounds

High

-100% to 10x

Bal (not clearly mentioned)

Fast growers

High

-100% to 10x

30-40%

Stalwarts (eg RIL)

Moderate

-20% to 50%

Bal (not clearly mentioned)

Note: I made the above table based on the discussion in the book

Some people ascribe my success to my having specialized in growth stocks. But thatâs only partly accurate. I never put more than 30â 40 percent of my fundâs assets into growth stocks. The rest I spread out among the other categories described in this book. Normally I keep about10â 20 percent or so in the stalwarts,another 10â 20 percent or so in the cyclicals,and the rest in the turnarounds. Although I own 1,400 stocks in all,half of my fundâs assets are invested in 100 stocks, and two-thirds in 200stocks [This shows that Peter Lynch follows more of pyramid approach].One percent of the money is spread out among 500 secondary opportunities Iâm monitoring periodically, with the possibility of tuning in later [ I think this is more like a laboratory for him to test his new ideas and if he get conviction he promotes his stock] Iâm constantly looking for values in all areas, and if I find more opportunities in turnarounds than in fast-growth companies, then Iâll end up owning a higher percentage of turnarounds.If something happens to one of the secondaries to bolster my confidence, then Iâll promote it to a primary selection.

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I have read another interesting book âActive Value Investingâ by Vitaliy N. Katsenelson in which he insist on the importance of recognising whether we are in range bound market (over a period of 5 years). Below are some of the interesting extracts from bookâ

During secular range-bound markets, every bull market becomes nothing more than a short-lived cyclical bull market that lasts a couple of years at the most (sometimes only months), followed by a declining cyclical bear market, which in turn may be interrupted by a cyclical range-bound market (as if things were not confusing enough). This cycle has been replayed in different variations over and over again.

In the range-bound market you should employ an active buy-and-sell strategy: buying stocks when they are undervalued and selling them when they are about to be fully valued (as opposed to waiting until they become overvalued). The range-bound market is brutally toxic to high-P/E or so-called growth stocks.

P/E is the investorsâ best friend in a range bound market, as its expansion turns into a source of returns (adding to earnings growth and dividend yield). However, if stocks are purchased when the P/E is above average (greater than 16), the P/E turns into a foe, as its compression diminishes returns.

On diversification: Uncorrelated stocks[my comments:I think this is the most important and most neglected stuff in portfolio management. It becomes all the more important when one is maintaining very concentrated portfolio of 8-10 stocks] needed in a portfolio to eradicate individual stock risk, but the number is usually given as somewhere between 16 and 25 stocks. This is another case where being vaguely right is better than being precisely wrong. I found that a portfolio of around 20 stocks is manageable and provides an adequate level of diversification; at this level, the price of being wrong is not too high, but every decision matters. A properly diversified equity portfolio should consist of stocks from different industries, of various sizes (from large-capitalization to small-capitalization), growth rates, valuations, and countries.

I am attaching two presentations which I found on authors website, which further explains the range bound market and its implicationsâ

Link to download presentation: https://docs.google.com/folder/d/0B8Mr8IuAEwz7Y0IwSWJ3RlJ0NkU/edit

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**Last thought for the day (hope to come back with few more **J) Special situations

Professor Sanjay Bakshi has re-iterated the importance of investing in risk arbitrage situations (special situations like rights issue, demerger, spin offs, delisting etc) on his blog and presentations for earnings market neutral returns. I think this is one of the best way to earn market neutral returns and also ensure that 15-20% of cash is available for reinvestment to take advantage of big drop in market at short notice (but nevertheless it may take 3-6 months to completely dilute oneâs exposure to special situations). Earlier I have totally neglected special situations, first fear of venturing in something unknown and secondly I thought when abundant opportunities are available for long term investment why to bother with something short term. I have never invested in special situations earlier, but over the last one month I have prepared a checklist to begin investment in this segment. I still need another week or so to fine tune it, will share once I am done.

**Edited extracts from blog of Sanjay Bakshi **

Why is risk arb fun apart from the money? Forces you to think rationally using expected value framework which is dynamic requiring frequent calibration of thinking in response to new information and new interpretation of old information, forces you to think about opportunity cost, requires multi-disciplinary thinking (e.g. probability, psychology particularly game theory, law particularly corporate and securities law, and finance), and of course the availability of un-co-related to market opportunities arising out of corporate actions, giving the arbitrageur plenty of very interesting things to doâ

It does not require making long-term predictions about businesses, managements, or the economy.

When thereâs a bull market on and you canât find good stocks to buy[ But I believe in current uncertain environment special situations can add few % of our return without exposing to secular bear or range bound market], risk arb comes handy. Itâs like a high interest lending operation. Money goes out for a short while, earns a good return (averaged out, if you do it right) and then it comes back, by which time stock markets may be lower and you may find a longer-term home for your money. So, one may think of money invested in risk arb as a cash equivalent but there are some exceptions to this rule.

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Great topic to start donald.

Very interesting to go through your experience. No matter how many books you read, the firsthand account of someone you know has a very strong impact on your psyche.

Excellent insights T Anil Kumar. Waiting for more stuff from you.

I agree about re working the valuepickr portfolio. WE should have a fixed amount of stalwarts/solid stocks available at attractive valuations at current juncture.

Problems about bear markets is not so much about valuations but about investor and fund manager psychology where there is strong urge/pressure to sell anything and everything that can be sold. I had found that in Oct 08 when for a stock quoting at 110 which was down 5% I had put in a bid at 101 and there also trade was executed.

Another example which made a lasting impression on me was that I was closely watching lakshmi machines works stock. it was at around 600 odd levels and I had calculated looking at the balance sheet that the company had close to 525 to 550 per share as net cash. I bought the stock at 480 thinking there was adequate margin of safety. And then the stock went down to levels of 420-430 which made me nervous and jittery inspite of my calculations and hard facts. On rebound I sold the stock at 500 odd levels bcos of the fear that the dip in stock price had created in my mind post my purchase. That in hindsight taught me a lesson or two in bear market psychology and how to keep faith in one’s own conviction and calculations bcos these kind of panicky situations dont last too long (although the bear market lasted from jan to oct 08 and even up to march 09).

Problem is having adequate money during such times. I have been thinking along these lines and questioning the wisdom of remaining fully invested in stocks during all market times. Even if you get one opportunity like oct 08 during a lifetime with being fully in cash and you have the courage and conviction to buy the right kind of stocks at that time, you end up being a super investor by the time the next bull market is halfway through.

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Anil Kumar - Thanks for taking this discussion forward. Please keep adding insights from yourexperienceand/orreadings . I agree this discussion stream requires good attention!Yes. we need to have the ability to take advantage of big dips in market.

Hitesh - Thanks for participating in this thread. Was advised by Mr D early on - you need to be able/prepared to take advantage of big dips in market - which means you must find ways of retaining atleast 15-20% CASH in all market conditions. Which also means - in a bull market - as you find the market heating up more, the CASH portion can proportionately go up.

One of the simple ways I found - of retaining 15-20% CASH ALWAYS - is to retain a clear demarcation between my Long-Term & Opportunistic Portfolio holdings.That way - theoretically speaking:) I should have no hesitation in off-loading some of the opportunistic portfolio holdings (even if they are doing very well), to take care new better opportunities that come along.So far this has been working for me.

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Amazing threads exist here. Donald, you make it so methodical and thought provoking. For a person like me with negligible knowledge on Stock Market such stuff give wings to my thoughts that travel in all possible directions. The way you present things goes on to suggest how well read you are and all the kind of mental exercises that you have gone through to reach this state u r in right now.Always perfectly framed well thought out sentences. U will make a great writer. Your writings are revolutionaly.

Hitesh, thanks for being there and having paticence to explain things in a manner that a novice like me can make sense of.

For me the most confusing part during these initial days of learning a business is understanding MOAT. I mean for a company like HDFC what is the MOAT. Why do not people talk about ICICI on similar lines? I mean both of them have humble beginnings and the position where they have reached is awe inspiring. If it is about ethics nd growth then why isn’t Yes Bank a better choice today? Why does HDFC stand tall above all?

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Even i tried to do something similar when the markets were “range bound” (as in till recently)and when they were very volatile (aka in 2008-09). while prices were below my cost, there were 10-12% jumps up and down which I felt i was missing out on. I tried buying and selling my existing stocks within the same account, whichled to immense confusion and record keeping (hdfc sec account is one of the worst in terms of data management). Then I started trading in another account (same/new stocks) to be able to demarcate these short term trades from long term investments (some had become long term by default given the losses i was sitting on). but that also didnt help matters much as i was ending up losing focus and conviction in my investments. I made losses, profits, loss-of-profits, everything. and i learnt that what works for me is to identify MYSELF as either ST trader or LT investor instead of the trying to identify the stocks in these categories. I have partly succeeded in it, but i still tend to give in to temptations sometimes. the risk is if you enter a stock expecting a short term pop of 15% and it gives you that, then how do you control your greed.

Staying away from noise is also very important. For eg i entered VST industries at 300 when dividend yield was 10%. this was in midst of 2009 volatility when stocks were all over the place. i got 30 Rs as dividend and plus the share rose to 450. i sold out laughing, thinking price will reduce and then i will re-enter. i am still waiting. imagine today at 45-60 Rs dividend waht would be my yield and plus the price is 1800. not that i did not look at it again. i kept on watching at 600, 900, 1200, 1400, then back to 1100and then finally gave up. becasue i was price fixated at every level.

as a learning - i watched mayur uni triple (started tracking it at 150 price adjusted), but was wary of small caps having burnt my fingers. and due to price fixation. finally i entered at 450.

holdings.That speaking:)) along.So

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This is a wrong notion regarding dividend yield, which I too used to hold. In one of the Delhi ValuePickr meets senior investors corrected me. Thanks! to them.

One should look at Dividend yield always with respect to Current Market Cap. It makes no sense for someone with VST bought at an average price of 300 to say he is enjoying 20% yield with Rs 60 dividend.

He is enjoying that dividend yield on the current value of VST holdings @1900 levels which is less than <4% yield. One needs to detach oneself from the mental bias of this dividend yield anchoring at purchase price.

Many investors from the forum, I talk to, still mention their very low purchase levels of Hawkins, Page, Titan as a comforting factor as the yield keeps improving every year(!!!).

All decisions regarding buy/sell/hold should be done looking at Current Market price and that alone. If the CMP offers considerable upside (25% CAGR ahead) and/or considerable dividend yield @CMP, buy/hold else that company has no place in your portfolio.

Imagine 1100and

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My 2cents here from my 1 year 1 month investment experience.

It is a common knowledge is that loss is 2.5 time more painful, that a gain of same amount. If you believe this truth, and have a mindset of return-per-unit-of-stress, than the most logical step is to be less greedy and bit more conservative. This implies investing in stocks which are

1> In conservative sectors like Pharma, FMCG, and Consumer Centric industry

2> Have very low Debt-to-equity ratio, and consistent ROE, ROCE figure of 20+

3> Have a solid moat (like Astral) or taking shares from bigger players (ARBL, Kajaria)

4> Have real good management (Your money is safe with them)

5> Stock trading at a good valuation, preferably PEG < 1

6> Have price movement graph as independent as possible from stock (secular price movement)

Investing in such stocks, gives good return in a range-bound market like last one year, when sensex moved 10% up in last 13 month period.

I hope these won’t disappoint me much in a bear case.

There is another approach to save yourself from sudden drop of sensex; the strategy is simple: have a decent percentage of your portfolio in fixed income, which will reduce your gain in bull phase and save you in a bear phase. This is what I follow in my case. What I feel is this approach is a must fro investing small/midcap stocks.

The 3rd approach is asset diversification to non-equity assets like gold, real estate, land, or starting your own business.

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Soumya,

There is a huge difference between HDFC and ICICI Bank. Just approach the respective banks for a high value housing loan say 40 lakhs+; for good measure throw in a PSU bank like SBI; and then enjoy the experience - tell them you want to transfer the high-value loan from another bank. (Check for who has more systemic checks & balances, and who are willing to cut enough corners to gain some edge).

Compare the consolidated balance sheet over the last 5-10 years and you will know more. There was a time when ICICI Consolidated BS was completely stretched (2009) - for the aggressive growth pursued. HDFC has always grown much more conservatively - at a steady 25-30% rate - even at the worst of times, and never anywhere near rocking the boat.

There is something about the company culture - the systems & processes, the checks & balances -that also perhaps influences business performance over the long term. HDFC Bank from the same Management is considered a far more conservative player but also a steady grower as we have seen.What does the market think of the 2 entities? Comparing the stock performance over last 5-10 years should also give you a good idea

Look at the steady 5yr Price-performance curve of HDFC Bank Link: http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/hdfcbank/HDF01

And look at ICICI Bank’s 5yr Price-Performance curve Link: http://www.moneycontrol.com/india/stockpricequote/banksprivatesector/icicibank/ICI02

That should give you some clues.

Also a senior investor had spurred me to think along a different line long back in 2008 - Which are the stocks the FIIs buy first - it was Infosys, HDFC, HDFC Bank in 2009 - the choices and order may have changed - but that will tell you a few things why certain entities will always remain more preferred over others - Business Quality/Management Quality/Performance

MOAT - is a very powerful concept - when understood in its true perspective. Many times I see the term overabused and sometimes oversimplified. In my experience dissecting strong fundamentals would lead you to say 60% of the picture, and often that is enough to differentiate. For example, the choice is very clear when you study BS growth of ICICI and HDFC or HDFC Bank over any 5-10 year period.

See this article of mine Comparing Private Indian Banks in March 2009 Link: http://seekingalpha.com/article/128707-india-private-banks-comparison-hdfc-a-clear-winner-over-icici at Seeking Alpaha (Take this with a pinch of salt, I was still very much green & mostly theoretical; numbers are not all, but they do tell us a few things).And then you also add-in Business Quality and Management Quality perspectives to this picture and you should be 80% there.

Having said that, Valuation is a different game altogether. You may have less conviction in the business, but it may be so undervalued (compared to fundamentals) that it may make for a compelling performance 2-3 years hence (like ICICI Bank has proven to be since mid 2009). Balancing the two calls is an ART form. Some people give more weightage to undervaluation. Some like me give more weightage to Conviction.

lots to learn in this thrilling game:)

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Donald

as somebody mentioned earlieryour writings are very educative and thought provoking helping individuals like me decide future course of action / strategy when markets are going up constantly/ heating up one should encash atleast partial without much greed thus reducing chances of losing profits to an extent which in hindsight now appear to be only paper profits accrued at some point of time in bull runs having experienced by meduring several cycles.

while I still have phychological block in being in cash of 15 - 20% ( mindset of losing oppurtunity ) but in hindsight / going back I see markets have always provided oppurtunity atleast once in a year to buy stocks at much lower levels as recently happened in case of Kaveri.

appreciate / learn a lot from your write ups alongwith that of Hitesh’s / Ayush / Rudra and many others on this forum.

have asked my son to go through valuepickr to groom him in financial learnings from age of around 19 itself so that he does’nt make all the mistakes I have made in my investing career.

warm regards

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I have posted my thoughts on portfolio concentration and cash allocation under capital allocation thread. I think a better understanding of this is also essential to structure our portfolio for all types of markets.

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Some more interesting thoughts from Joel Greenblatt from “You can be a stock market genius”

Donât underestimate importance of Cash allocation as diversification strategy:

Its important to remember that for many people a stock portfolio is only a portion of their entire investment holdings. Most people have a portion of their assets in different asset classes. If you are looking to avoid putting all your eggs in one basket, this broader type of diversification, over varying asset classes, will accomplish that goal more effectively than merely diversifying your stock portfolio. In other words, donât screw up a perfectly good stock-market strategy by diversifying your way into mediocre returns.

Leaving some of your assets on the side-lines (out of the stock market) should be our compromise to prudent diversification. As long as you are willing to do your own homework, a strategy of owning a select handful of your favourite stock situations should yield results far superior to a strategy of owning dozens of different stocks or mutual funds.

If you have arranged your overall portfolio of assets so that you can weather the inevitable market downswings without being forced to sell, this slight difference should not matter. What matter is that over a period of even 5-10 years, you can have your cake and eat it too?

PS: I am aware that while posting models from various investment gurus I may have posted contradicting thoughts. My purpose is first to find out as many models as I can and then everyone can “Sing their own song” depending on their preference and priorities.

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Hi Donald,

Very nice thread. Yes, markets are really dynamic and we need to keep evolving and adjusting with the changes and the opportunities available. You have raised a very valid point that we are lacking on some good large caps which can be consistent compounders and once we are able to analyse a large co well, we will have lots of learnings.

Do hope to work on this area.

Ayush

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Hi

I came across something interesting while reading a interview of Private equity fund director. I think she has given good framework on how to manage risk under current uncertainty

"Bala Deshpande, Managing Director of New Enterprise Associates, interview in Entrepreneurial magazine, January 2013

_Diversification: _

The biggest thing about venture capital is we are placing our hopes on future events which in todayâs world are very unpredictable. The way to address that is to be systematic in your portfolio construct, which is really sector diversification, stage diversification [for listed companies I think we can interpret it as diversification across Micro-caps, Small Caps, Mid caps and Large caps] and time diversification. [During the interview she mentioned that â In 2008 trends change significantly and thatâs when we picked up few assets. I think she is stressing importance of keeping cash balance to take advantage of any significant change in market trends]

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Once again a wonderful thread to read on! Which brings some interesting questions along:

  • Why is the Valuepickr portfolio so strongly focused on small and mid caps?
  • Can’t large caps offer the same growth (CAGR> 25%) ?