An aggressive contrarian portfolio

Q&A: Questions & Answers Portfolio Q&A
24

You have put two qualifying words to your portfolio. Aggressive and contrarian. Amit Jain (jamit05) has already explained beautifully as to what is meant by contrarian investor. Nothing more needs to be added to what Amit has already said.

Now tell me. On which aspect are you trying to be aggressive? Aggressive to make money quickly? Are you aggressive in assuming that bad and dishonest managements of some of the stocks mentioned by you are already discounted by the market? Are you trying to be aggressive in assuming that these bad managements will come good and clean sooner than later? See assumptions no. 1 to 4 mentioned in your first post have nothing (specifically and specially) to do with any of the stocks mentioned by you.

From whatever a little experience I have gained (by loosing good portion of my portfolio. I have paid tuition fees), I would like to tell you this important point. Never ever bet on dishonest/bad management team. Market never likes them. Probability of loosing money by betting on bad/dishonest management is far far greater than making money. Trying to make money by betting on bad/dishonest in itself is not a good idea and trying to do it quickly, will be suicidal. Apologies for using such a strong word.

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26

@jamit05

I donā€™t claim to have either insider information or deep industry knowledge. I am just saying the stocks which were trading at 3x P/B are now trading at 1.5x, in case of HFCs. So, I would rather invest in them now than 1 year back. As far as growth projections and management quality is concerned, we investors really dont know more than what was there 1 year ago in public domain. A severe price reaction and negative media sentiment are not a valid read for not to invest.

With my experience, the hardest thing in investing such stocks is it really takes guts to hold them because a small negative news penalises the stocks in a big way.
The same happened with metal stocks in early 2016 and NBFCs in late 2016. I wish I had a good discretion to hold them.

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27

@bullforever

Thanks for sharing your views.

Portfilio is aggressive because it is concentrated.

Agree that having dishonest management would harm rather benefit in the long term irrespective of buy price.

In my portfolio, the companies with questionable management are

Yes Bank: Itā€™s a board room fight which is not abnormal in corporate world. The issues related to digreesion of NPAs is already checked by an independent institution (RBI).

Sun Pharma : I doubt it. Issues are 15-20 years old pertaining to a procedural lapse wrt insider trading window.

Rest of the companies donā€™t fit into this criteria. Falling of shares doesnā€™t mean management is dishonest or books are cooked.

28

You are taking Risk, and you will be rewarded accordingly. Just like taking a trade. If you take enough number of such trades, and do proper money management, then you may turn up on the positive side. The risk reward ratio in these type of trades is unlnown; provided there is even a common pattern to them.

But, that is not in the realm of Investing.

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@jamit05

It is definitely not trading. Trading is mostly momentum with a very short time frame based on technicals.

Anyways, it would be interesting how this portfolio pans out. It will take 1-2 quarters to know if fall is based on fear or some underlying fundamental reasons.

30

Have you considered buying call options instead of taking a cash position? A call option will limit your downside to the premium paid while giving you full upside less the premium paid. The reason I am asking is because we will know in just few months if the story is getting better or worse and a call might be a better alternative than a cash position. If the story is getting better we can always convert call position to cash position.
I am curious to know your thought process.

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31

Long option positions always make me uncomfortable. Losing time value is the worst you can witness while having long term bets. Also, because implied vol is very high in these stocks, premium to hold an option is also high. I can lose as much as 10-15% of my capital in long calls if stocks dont move in 2 quarters. I would rather hold in cash.

I prefer shorting put option rather going long call. But upside is limited there.

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32

Is hedging the PF good? My PF is also tilted to BFSIā€¦private banksā€¦HFCā€™s they constitute to 90%
I have never learned to hedgeā€¦all i do is a buy in cash positions and i rarely sellā€¦even though i have not made any returns in last 2 yrsā€¦should i also learn how the shorting works?..I only feel that good scrips will rise no matter how long they takeā€¦

33

I am not capable to answer if hedging is good for the PF. But IMO buying options instead of long position in any stock may disrupt/dilute your due diligence and stock picking process. Psychologically it may lead you to take a short cut and/or invest in stocks with less conviction as your immediate downside is limited.

34

You have risk in this portfolio by not being fully diversified. For example, even though pharma and IT are in a recessionary downturn, you are not invested into it, and it will benefit from not being in a Global Recession.

You have too much faith in the financial and related sectors of lending. Sure, it has been hit hard, but hard hit sectors do not all become value, unless you play the value play across multiple sectors and diversify. As Wall Street says, when you see one cockroach, there many be many more and they come out slowly.

NBFCs, Auto, Commodities, Pharma, IT, Cement, Infrastructure, Developers, and Real Estate are all showing some sense of value. Diversify into more than the ones you have, and then you have ā€œContrarianā€ and ā€œValueā€ based Diversified portfolio.

No one knows the future, but investing with this ā€˜value playā€™ and holding beyond the patience of others is how you will win in the long term, and turn money into wealth. I have been through too many examples of big successes in the past and (as an example) TGBL, Tata Motors and Hind Copper are my most recent ā€œpatience testsā€ in progress. It is saying to me daily ā€œdo you still beleive in meā€? My answer is ā€œI donā€™t need to cash out or donā€™t need the money, and not competing with anyone, so, just do your think TGBL, TaMo and HindCopper and I will standby you and with youā€!!! Is that smart or stupid? Lets see in 2025.

KKP

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35

You donā€™t need the money, so you donā€™t have to sell but what about the opportunity cost of being invested for so long, if the conviction and patience fail to deliver despite the bets being value picks?

36

Well, we all have to be active with our investments, but never forget that we are invested in a business. If you were bored in RIL for example when it was riding down / horizontal, then an investor would be sitting on the sidelines through the entire Jio expansion. HUL did a similar move, DRL has done the same thing, Motherson / GMM / Godrej Properties etc. These are non-performing stocks from time to time, but those are ā€˜resting phasesā€™ of stocks. Let them rest, get some disruptions of product/services and then let them get their rocket boosters on, and take off again.

Small Caps move up and down sooner, Mid Caps take a bit longer, and Large Caps have bigger waves and cycles. Ride ALL three waves with a mix of stocks, and stay in active mode, but not a trader, and still an investor. Buy in slowly, Sell out slowly, watch the news, charts, announcements, earnings etc, and follow as many stocks, but never forget WHY you got into this business.

While HindCopper is challenging my original thought and theme that each EV car is going to need 83KG of copper vs 6KG in ICE, I am down by 4% in my buy price, even though I was up 120% within 30 days of buying, but did not sell a single share. Now what? Well, it is NOT an opportunity cost that I lost since I want to sell at prices over 200 which would be 400% to 500% from now. So, holding for my macro theme to play out. I am not in a rush, and not competing with anyone, and do not report my gains to anyone, including my wife!!!

Opportunity Costs, Performance Relative to Benchmarks is all for people who are in a Race with the world. Forget that. Make money, Build Wealth. Manage Wealth. Enjoy the achievementsā€¦

I may be wrong in many peopleā€™s books and views, but I do not buy into those views so, I am happy with my approach since I am achieving more than my own expectations of good money growth (Net-Worth is all that matters).

KKP

PS: I will stop here since moderators on VP do not like too many of my messages!

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37

Have you considered buying insurance for this portfolio in case something blows up? I mean buying puts. Your hypothesis is that market is overreacting (and I agree) but there is always a probability of something blowing up to the point that you end up booking losses. Puts might offset some of that.

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I would call it an opportunistic portfolio rather than a contrarian one. I maybe wrong but I feel your buys are opportunities that recent macros presented and many investors are taking that opportunity. So, we cannot be a contrarian if many other opportunists maybe buying on same stock. Only difference is, unlike you, they are not buying all of them :slight_smile: If this is your complete portfolio, why not add some secular growth stories in mid caps which can give you similar returns. A contrarian,according to me, maybe buying Telecom or Healthcare (not pharma) stocks at the momentā€¦which no one else is touching. Pls note I respect your opportunist and risk taking portfolio. I am just presenting my thoughts. Thanks

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@Investor_No_1

Yesā€¦ it is an opportunistic portfolio. But at the same time, it is contrarian. I am not averse to buying secular growth stocks. Only the quality companies are still trading expensive. When you are small, you can afford concentration.

40

Portfolio hedges are expensive. Rolling put options every month will cost at least 2% per month for 5% OTM protection. I would rather lose 10% of my cash portfolio if thing really go down. These stocks, especially HFCs, are purely technically driven right now. They need a good quarter to come out of this mess. I am not being optimistic, juat realist. Things may go down worse before they go better. These stocks are currently valued at near 2013 bottom valuations when novody was interested in HFCs and interest rates were touching the roof. In a dovish interest rate scenario where growth is ample, these valuations are inexpensive. Again, cheap things can remain cheap fpr a long time unless a trigger comes. I am willing to wait, as of now.

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41

@kkpatel1924

I agree with you.

I am not married to this sector or these stocks. Neither these HFCs are great brands to have trust in. Instead, If we open their history, there are inferences of collusions at best ( nothing came out in real though, still something to know about).

My assessment is IL&FS has created a panic. People are evaluating every company with the same metrics. There are value opportunities because of that. I am open to diversification once I am sure there is no opportunity here and I am in a deep shit hole. But willing to bear those drawdowns until then.

42

I value your opinion. Theme based bets take a long time to play out. Sometimes, all one has to do is wait.

I agree with your assessment that our performance is not measured against some index like for portfolio managers. We donā€™t have any concentration limits to any stock or a sector. We donā€™t have any liquidity criteriea. Thatā€™s the main advantage, as Peter Lynch says, retail investors have over the fund managers of Wall Street.

43

If the intention is to be aggressive, I would think it is better to bet on other beaten downs in the sector of your choiceā€¦ Banking and financials are proxy to growth of other sectors and overall economy in general.

Now, when you choose a portfolio such as this, your risk reward ratio gets skewed! Why will anybody want to do business only with beaten down financial companies when they have the choice to go with others? But thatā€™s not the case with others say ā€œSun Pharmaā€ among the ones that you have chosen - when it recovers it can really roar because of brand loyalty associated with it.

Discl: I have positions in Yes & Tata motors, and I think it will recover though I still have question why should customers continue to be faithful to it.

44

As NIFTY has hit new high, its time to re evaluate the performance:

Company - Weight - ITD Return
Yes Bank - 20% - 28.6%
Tata Motors - 17% - 24.4%
Sun Pharma - 15% - 4.2%
Ujjivan - 13% - 46.8%
Indiabulls -13% - 7.1%
Repcohome - 11% - 35.9%
DHFL - 11% - (-27.6%)

Overall - 18.4%

Out of all the contrarian bets, DHFL did quite worse on account of low disbursements and reports of fraudulent accounting practices. Small names like Repco and Ujjivan did really well. At the same time, Yes bank is coming out of skeletons under new management. Going ahead, as the clarity emerges regarding management practices and capital infusion, stock may be valued near to its private banking peers.

Tata Motors might have bottomed out its earnings. Need to clearly watch how sales in China pans out in coming months. However, Stock still trades very cheap compared to its domestic and global peers.

Please post your views!

Thanks!

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