Factories and Workers are not interested in serious skill development as there is no pressing need currently
Can’t imagine infosys doing it. They does not have heart for any big acquisition as they never developed brains for it. Under Sikka I dont know.
Who will provide returns, Apple or factory manufacturing electronics, glass, casing, assembly. We are factory. More phones will be sold in the world, factories will have more work and mark-up margin but who will make money.
That is for a year or a contract. What happens after contract is over.
Talking specifically on cheap labour and skill. IT does not carry a cheap labour competitive advantage as automation is the new tech trend where lot of middle IT managers and technical staff have to move out. Skill is one of the biggest concerns as year after year the engineers are produced of sub standard quality especially if you only work offshore. Keeping good talented staff is another challenge. You need to put cash to good use and just acquiring companies would not result in top line growth. It requires a new business model and mindset. IMHO it is not only Indian IT MNCs who are struggling even the biggie like IBM is finding it hard to find its feet under the treacherous water of IT mega trends.
I think IT is more of individual stock picking and company specific rather than Top down approach taking a sector call.
While I admit that large caps provided stability to portfolio and that presently you are finding comfort in large caps, considering that age is in your side, I feel you should not avoid mid caps altogether. Having a mix of Large and mid cap may not be a bad idea. Carefully chosen midcap/ small cap stock with honest management and good dividend yield can be as safe as Large Cap along with probability of adding alpha to your return.
Also, I don’t think adding put options will insure the portfolio to a great extent. In equity investment,risk can be reduced (not elimintaed) by knowing what you are doing, so only well researched conviction and reasonable valuation provide insurance.
But at the end of day, what matters is your comfort and style.My views may be biased since I invest mostly in mid/ small cap stocks.
Interestingly, the very reason that age is on my side (23 yrs currently) I want to stick to large caps. You need to understand Kunj that the portfolio size is not small. It has been painstakingly compounded for last 25 years at 15% CAGR under the supervision of my father. The last thing I would want to do is to destroy it.
Quantitatively speaking, higher you go up the market cap companies, lesser landmines you get to encounter which can potentially destroy capital. Unless I have the knack of very deep analysis of companies, odds would be always against me if I venture in small/mid caps. Thus I intend to stick to top 15% companies listed at NSE (around 240ish companies) for the upcoming business cycle. If my analysis is correct, every 1 out of 6 stocks in top 240 would give 20%+ earnings growth.
Simply by using Screener.in website along with the knowledge gathered from Basant ji’s book The Thoughtful investor and the Valuepickr resources section, I can knock out 2/3rd of them. Elimination is much more easy than selection. This leaves me with 80 companies where every other company has the potential to give me 20%+ earnings growth. Note that most of the companies mentioned by Hitesh ji were present in those 80 companies list. At this stage, even if I buy all of them with a tiny 1.25% allocation to each of them, I am pretty sure that I would beat the market.
The last thing left is the valuation of these 80 companies. This is the most tricky part. Elimination no longer works as simply removing seemingly expensive companies would deteriorate the quality of my selection basket.
Here, I have to take help of the forum through discussions like this and inputs from enthusisatic Valuepickr tribe. I have to hit the soft spot between too expensive companies vs low earnings companies. Nevertheless, even coming this far is an achievement in itself.
PS: On the aspect of Put options not protecting the capital, I would partially agree as Put options work when you keep high deductible rate. Thus, for example restricting my downside at maybe 70% of networth through Put options is much better than at 90-95%, mainly because the options get extremely expensive near the current price range.
Wow @hitesh2710 for such clarity of thought and clarity of words! Just Wow! Thanks!
Nishant,
Just want to make several quick points -
Regarding IT companies focusing on IoT, I feel “IoT” is just a buzzword. My profession involves working for IoT products, I think nobody has really figured out how to make money out of IoT devices. (Fitbit bands are selling for 10k Rs., but Xiaomi is making similar bands for 1000 Rs.). Big companies and Big analysts are propagating “IoT” fad but I don’t think it is so easy to figure out who will make money out of IoT boom.
What will IT companies make money out of - apps? but aren’t they already developed for smartphones? Will they make money out of software integration - but how much that market size would be compared to overall market? Will they provide services - like home appliance monitoring or heart rate monitoring? But how successful would that be? And wouldn’t that require product mindset which our “loaning people” type IT companies lack? (I can go on with my rant!!)
With portfolio allocation, yes age is definitely on your side. But I feel one has to survive one boom/bust cycle (of ~ 8 years) to really get knack of portfolio allocation and understand it’s importance. When one reads early stories of VP founders, you can find that many of them burned their hands in 2008 crash. (I’m into my third year of cycle which started with 2012-13 boom).
I think you should not really stick to formulas in investing like top 15% of NSE or companies below 15 P/E or only having 8 stocks in your portfolio. If investing was so simple, everybody would have made money.
I think you can do a lot of experiments with small amounts of money (e.g. I did with ~10k allocations per stock for 2 years) to really find out - what kind of investor you are, how business growth unfolds (or doesn’t unfold), general market moods - bullish/bearish. Then gradually you can increase your allocation as you consolidate a strategy. In all this, there is no substitute - to reading company annual reports, listening to conf calls, knowing basic financial calculations and some common sense day to day observations.
Just for the record, I am “buying low selling high”, “Graham” kind of investor and I know it is badly out of fashion. I have started adopting “Peter Lynch” way halfway and getting started with “Phil Phisher” way. But I’m in no hurry to change my style. And 20% CAGR for last 3 years is not that discouraging to leave “Graham” way.
Reflecting on your points Rupesh, now I think I do have some thoughts of my own.
Sticking to higher market caps reduces your odds on landing on a landmine. Unless you are a pro in separating wheat from the chaff, you are likely to encounter many more promising but eventually a half winner or failures stocks, if your search space is all the listed stocks in the exchange. Restricting ones boundary to only large caps when one is not a pro, is not a bad strategy to follow.
Formula based investing works if one knows the right combination of formulas. These formulas are not really scientific which you can give out to everybody. It’s much personal which suits one’s temperament. Also, some subset of the formula might be static and rest dynamic which changes over period of time. I would again repeat that these formulas are very personal.
Regarding IoT, with due respect to all engineers out here working in IT, I do not really listen to them. They are the workers, not the strategists who have the bird’s eye view. I personally view IoT as rebranding of old stuff out there just like business analytics to data science. And it’s not a zero sum game where only one or two gains out of these IoT bubble. Large caps IT will pull every string to get a substantial share of the opportunities ahead. Regression to the mean is a phenomenon which really applies to sectors like IT. The growth slows down in some phases but picks up again later in some new market.
I never mentioned that I would only stick to low pe stocks. As I mentioned above, low PE stocks give a better margin of safety if the company is a large cap and good dividend paying company. The market has lower expectations of growth from these companies. But some of them keep surprising in growth even after being a heavy duty old guys. Temporary PE reratings happenings are very much a possibility in such companies to a large extent.
Sticking to 7-8 companies is not the only way to make money. But it is definitely one way to make good returns if it suits my temperament. I am not trying to generalize saying that having 8 stocks is the best way out there.
Investing is simple and complicated at the same time. Depends on how you look at it. Being a simple activity doesn’t guarantee that everybody would succeed at it. Some people get bored in simplicity. Hence they try to make it complicated. And they fail after making it complicated. It’s more about how long can one persist with simplicity.
I just have 13 months experience of being in the market. So I agree that I have a lot more unknown unknowns in my methodology perspective. But atleast being aware of it in itself is a crucial step.
I dont have that much of investing experience as some of the senior boarders but i still…i find a glaring omission in all this discussion on portfolio construction.
According to Ken Fischer, a lot of studies have demonstrated that portfolio returns depend largely on sector selection and selection of individual stocks in thr sector have a minor role…i dont think that this should be interpreted as an endorsement for selecting the absolute duds in a a particular sector.
What i find perplexing is that there is no discussion on sector rotation in the portfolio construction…in the 2003-2008 bull market sectors which performed very well were infra, real estate, manufacturing, metals, finance etc…in the earlier bull market of 1998-2000, the sectors which performed well were It, communication, internet etc…
Those who invested in beaten down IT stocks in 2003-2008 were still fighting the last battle…while thode who were invested in infra, capital goods in 2012-2016 too were fighting the last battle…
The question that arises is whether those investing in pharma, auto, fmcg and consumption story for the next 3-5 years…are these people still fighting the previous battle…
How do you know the " battle" is over? Not all “battles” follow the 8 year cycles
On a more personal note, I find the word battle too intimidating. The sectors are not playing a zero sum game between each other. On top of that, the definition of sectors is very outdated in my opinion. For example, the IT sector itself needs to be decomposed into several of them.
Do rember the experience of those investing in fmcg, pharma, autos and it in 2003-2008…
For the next 3-5 years, Prashat Jain of HDFC asset mngt says that manufacturing, capital goods sector will again come to the forefront…this assessment makes sense…its the most beaten down sector…some of the best investmrnt opportunities can be found here…
Why should we not search for bargains in manufacturing, infra, infra finance, capital goods, psu banks etc…these sectors provide some of the best value investing opportunities.
Disclosue…my portfolio has three themes…manufacturing, infra finance and sugar(cyclicals)…
Can margin of safety be found only in largecap stocks…if we invest in stocks such as srei infra finance, pennar industries, fedders lloyd, aksh optifibre, idbi , oriental bank, j&k bank…etc…how much is the risk of permanent loss of capital…and what can be the percentage gain in next 2-3 years…
How can a portfolio construction strategy completely disregard sector rotation(howsoever defined) and market cycles…
Suppose Modi wins the next election too,…which sectors will then lead the economy…with his emphasis on make in india, digital india, employment generation…are you so sure that market leadership will still be provided by FMCG, PHARMA, etc?
Nishant: i agree with you with regards to subdivision of IT sector…there is a sub sector within it - cloud computing. If you can study that subsector, it seems good opportunities for long term / multibagger potential are available there…for those who can really understand it well…
Unfortunately, i dont have much understanding of IT…so i cant benefit from it…perhaps you can
Hi Mehnazfatima, How do you go about selecting sector for next leg of bull run? I mean how do you analyse or what all factors you look at and arrive at a particular sector?
Savishesh: I am not that experienced in investing, I will not claim that kind of foresight. Here I would follow the expert advise…
.for example Besant Maheshwari says when a sector is getting rerated most of the stocks in that sector start rallying at the same time…If we apply this insight, I find that many PSU banks and financial institutions are giving bottom formation signals…so that would be a good sector to look at…
Or we can listen to recent lectures of Prashant Jain of HDFC mutual fund…he says that the capital goods / manufacturing sector is now coming to the forefront and hence HDFC mutual funds relative short term under performance is because of their moving out of now popular sector and moving into cap goods / manufacturing sector…
Or we ca go by the theoretical framework for sector rotation as explained by Martin Pring in his book.
HereI would like to point out that Shankaran Naren of ICICI mutual fund is a great exponent of the cyclical investing / sectoral rotation…
Hey, you sound so confident on how much returns you will make in the future. This kind of thinking really scares me. Even the long time experts like Warren have refrained
from predicting how even tomorrow will look like. And here we are talking of 20% return with certainty in 6-7 Yrs!
I know IT isnt really booming, but its surprising to see the amount of negativity surrounding that sector :). A few observations from the sector:
I work in one of the global IT companies like a lot of others here and I know there still is huge demand and that we are not able to cater fully to it.
Most global companies are now using India as their base destination for IT development - be it manufacturers like Bosch, Honeywell or IT giants like Amazon, Microsoft or banks like Deutsche, HSBC etc. The point is that India still has the largest pool of IT talent in the world - and its not going away anytime soon - especially with the H1 visas decreasing
IT as you rightly point out has multiple sectors within itself. IT services, IT products, IT startups, IT consulting etc. Large Indian IT companies have a foot in each of these pies. The short term problem is automation in some of these IT support services. The long term problem is that Indian IT companies are still overly reliant on IT services. IT services in turn are usually reliant on the businesses which they cater to. This means that if a particular sector does well, IT does well along with it - especially in a situation like now with rapid technology changes. Unfortunately, US BFSI isnt doing too well right now. Also they are increasingly using captive India centers to further save outsourcing costs. All this has resulted in slower growth for Indian IT companies.
I agree like others that the best times for Indian IT is long past, but being mature businesses, I expect them to continue delivering decent results as long as wage inflation in India doesn’t hit them hard.
