Cathene's dream portfolio (a theoretical portfolio)

I have been going through this forum for a long period of time and in recent days of market correction thought of creating a portfolio with maximum safety of margin as any less emphasis on this could wipe out the entire portfolio and bleed in red.

This portfolio has been created purely with ideas derived from the investing style of Mohnish parbai with the Philips fisher scuttlebutt style and peter lynch idea of buying anything that has potential and holding on to it with conviction (any n no of stocks). Deeply influenced by Alan Turing’s works and idea and this designing is based on his mastermind thought process.

This is my theoretical portfolio and it has only structures or designs of parameters a ideal portfolio should have and which will be tweaked and changed in the passage of time with various inputs from the fellow members of this forum

These are certain abreviations used in the description and calculation of the portfolio

How allocation is done

CA = 1/(X x 2^N)%


CA = Capital Allocated
EPE = Expected Price to Earnings multiple
M/C = Market price per share / cash flow per share
N = Stock position of the stock in portfolio
X = no of stocks with the same expected PE
T = no of times the earth rotates the sun

Based on this parameter the entire portfolio is formulated and constructed and when a more better approach is found the changes could be incorporated in the structure of the portfolio.

For example

Example 1
Let us assume T = infinity and we have a stock A with EXPECTED PE within the time limit specified as 2 and stock B with the EXPECRED PE (within the time limit specified ) as 1 and stock C with EXPECTED PE (within the time limit specified) as 2 .The rest of the portfolio is held in cash.


EPE= 1
EPE = 2
EPE = 3

The order of the stocks in portfolio is

Stock B with EPE =1
Stock A with EPE = 2
Stock C with EPE = 2

Which implies the position of the stocks as
1st position Stock B
2nd position Stock A and Stock C

The Stock B has EPE OF 1
When EPE = 1,

N= 1

NO OF STOCKS WITH EPE = 1( since only stock is available with EPE value specified )

CA = 1/(X x 2^N)%
CA = 1/(1 x 2^1)%
CA = .5 *100
CA = 50%

Capital allocated for stock B is 50%

The stock A has EPE = 2
When EPE = 2,

And therfore
N = 2

No of stocks with EPE =2 (Two stocks are available with this expected PE)

Therefore X = 2

CA = 1/ (X x 2^N)%
CA = 1/ (2 x 2^2)%
CA = 1/ (2 x 4)%
CA = 1/8 %
CA = 1/8 * 100
CA = 100/8
CA = 12.5

Capital allocated for the stock A is 12.5 %

When the above calculation is repeated for Stock C the capital allocated value for the stock C is 12.5%

Example 2

Consider the stock Z with the expected price to earnings multiple of 8 and stock Y with the expected price to earnings multiple of 12.

For the stock Z
EPE = 8
And therefore N = EPE
And N = 8

And X = 1

CA = 1/(X*2^N)%
CA = 1/(2^8)%
CA = 1/(256)%
CA = 100/256
CA = .39

The stock Z has .39% of the Total capital under allocation

The stock Y has 0.024% of the total capital under allocation

The greater the visibility of earnings over a very long period of time the the greater the allocation and greater the conviction and concentration for the stock which can make the earnings equivalent to the market capital over any specified period of time which initially can be assumed upto infinity.

All members of the forum please go through and suggest your valuable inputs and changes and errors if any if present in the portfolio.

Happy investing :blush:

1 Like

Considering Asian paints

The current market capital (as of 2018,September)of the company is 124053
The current net profit and operating profit median is 3300 (all the values are in rupees crores )

Considering the company runs upto infinity time (ie until the end of time ) we are arriving at the total operating profit and the net profit median to be around 10000 crores maybe in the period of 20 years to 30 years for the same market capital . (This is just an assumption for illustration purpose and not to be taken as data. Each person should arrive at this value based on your own conviction and risk reward expectation)

Now dividing the current market cap by expected net profit and op profit median we arrive at the EPE value which is nothing but the expected price to earnings multiple for a time period of holding which in this case is considered to be 20 to 30 years. The EPE value is

EPE = 124053/10000
EPE = 12 (rounding of the values )

Applying the value to the CA formula (the capital that needs to be allocated to Asian paints based on the investment horizon according to the formula provided)

CA = 1/(X x 2^N)%

Here X =1 since only one stock is selected and N = EPE and hence N =12

The position of Asian paint in the portfolio is 12th position with allocation of capital as

CA = 1/ (1 x 2^12 )%
CA = 0.024%

The Asian paint stock is allotted the 12 th position with 0.024% of capital allotted to it.

Still working on this thought process. (This is just in alpha stage any helpful ideas and tweaking to the proposed idea could be very useful ).

Please read and give your views forum members

The idea is
The first Stock position has 50% capital allocation
The second stock position has 25% capital allocation
The third Stock position has 12.5% capital allocation
Every Stock position has fifty percent less capital allocation than the preciously available stock position

By the time forth Stock position is reached 94% allocation of capital is done

Each position can have x no of stocks. Ie the stocks having the same expected PE multiples are clubbed onto the same allocation bucket

For example if we have two stocks say rain industries and sterlite technologies with expected PE multiple of 1 (EPE) then the CA of 50% allocated to the EPE =1 (stocks in the 1st position) so rain has 25% allocation and sterlite has 25% allocation

But the optimal portfolio should have only one stock in each position which means the optimal CA (capital allocation ) formulae is

CA = 1/ (2^N)%

Without the X factor

This is the perfect ideal cathene dream portfolio

(The stocks mentioned in the post for illustration purpose only kindly investors do your own due digilence before investing in any of the above mentioned stocks )

Interesting thought @cathene

Why so? When you have available options with a EPE of 1, why even go to a stock with EPE of 2 and not consider it?

Did you backtest this idea?
What about the VaR, aren’t you just keeping it too high with this skewed allocation?