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)%

N = EPE

Where

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.

ORDER OF THE STOCKS BASED ON EPE

EPE= 1

EPE = 2

EPE = 3

Upto

EPE = N

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 = EPE

THERFORE

N= 1

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

X=1

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,

N = EPE

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