Excellent point, this in my opinion is a myth that financial media has propagated for too long. History is replete with examples where the most often repeated fundas have led investors downhill
Myth 1 - One cannot go too wrong investing bulk of the portfolio in large well managed companies.
Say that to the US folks who lost money heavily in the Nifty 50 stocks. Investing never is/was about how well know the portfolio companies are. If someone hasn’t heard about a company that does not mean it is not a quality company, it just means that the person is ignorant.
Myth 2 - Diversification is absolutely essential for investors
I work with super HNI’s for a living, I am yet to meet a single person who has created wealth from a diversified approach. All abnormal wealth creation results from concentration, find the right horse and bet on it big enough to make a difference to your life. For somebody in the wealth creation phase, diversification won’t do much for you other than protect downside. For somebody who is already wealthy, diversification makes perfect sense since the risk reward ratio significantly changes once you already have wealth. One cannot minimize regret and hope to create abnormal wealth at the same time, you got to make your choice and make your bets accordingly.
Myth 3 - Small cap stock are risky
Tied to point#1 above, this is actually a ridiculous generalization. If you have a small cap company whose market share is more than twice that of the nearest competitor and is steadily gaining market share from unorganized players, how can that be risky just because it is a small cap? What you have in the small cap segment is liquidity risk and the risk of over reaction to events, other than that I do not see why a small cap should be riskier than a large cap.
I don’t know if anyone got hurt by diversification but I know a number of folks whose financial health deteriorated beyond repair riding tech wave in 2000 and infra wave in 2008.
Not sure if you are passively charging me with propagation of any of the “myths” you mentioned here. Let’s make it clear that what I define as large cap is something above 10k crore market cap.
Never I said that margin of safety can only be found in large cap stocks. I just meant that restricting your space to large caps is one of the strategies one can use. At the end what matters is that one has few good companies in his portfolio. If one’s search space is too large, an average investor can possibly get overwhelmed with choices. For every large cap company out there, there are probably 7-8 small caps existing. Also, most of the sector leaders exist today as large caps. Investing in the sector leaders like Kajaria, PI, Eicher, Amara Raja, Hero, TCS, HCL, HDFC/Indusland bank at right valuation is not a bad idea. Please understand that I am not saying that the opposite is also true ( which is that buying non leaders or non large cap companies is a bad idea ). Also, One still has to apply old school filters on top of these large caps and stay updated with the latest annual report and concall nevertheless. I am not saying that one can blindly buy any large cap company.
Not sure if I emphasized that diversification is necessary tool. If still in doubt, please read the heading of this thread
Of course just because a company is small cap doesn’t mean it is riskier. Never claimed that. If one can manage to operate in such a large space of stocks ie 3000 listed companies at bse and nse combined, well I wish him or her all the best with the choices. I am personally not capable of handling too many choices. So, I would restrict myself to large caps and try figure out some of the good picks from there. At the end I just have to choose maybe at max 7-8 companies from the restricted space. Hopefully, I won’t do too bad with the approach.
Disclaimer: not invested in any company mentioned above, yet.
Well, there is a reason for everything.
Most retail investors go after penny stocks or third rate stocks like Opto circuits, Kingfisher etc. They see that stock has fallen from 100 to 10 and hence it is cheap and it may go to 100 in a couple of years making it a 10 bagger. Comparing an average retail investor to guys here is not logical. Only 2-3% of Indian population invest in equities and probably only 0.2% invest directly in stocks, and probably only 0.0002% invest in the right stocks.
Hence, for an average retail guy who cant differentiate Shilpa Medicare from marksans pharma or opto circuits, an Infosys is a lot better in my view!
Maybe you are right in saying that comparing an average retail investor to guys here is not logical.
I personally do think that just being in this forum doesn’t mean that I should right away start investing like a pro. As I mentioned earlier, I would gradually improve my stock picking abilities overtime through reading and investing experience. Till then, I would rather play it “safe”
I guess the point I am trying to make can be made clear by looking at analogies from other spheres -
Every middle class parent in India gives the same advice to their children - “get into a good college, study well, land a good job & settle down”. Good advice? Maybe, surely not bad advice at all. But will you make it big if you follow this to the T? Most probably not. Following this may only ensure that you are an above average guy leading an above average life where the crests and troughs aren’t significant.
Ronnie Coleman, multiple time Mr Olympia winner - “Everyone wants to be a bodybuilder but nobody wants to lift heavy weights”. Avoiding heavy weights will ensure you never suffer a bad lifting related injury, fact is unless you can bench press 1x your body weight for reps you will be an average guy. The best guys in the business push their bodies everyday. Of course telling the average guy to bench press his body weight ain’t sensible. Most medical professionals also advice people to stick to light exercise to stay healthy, try telling a medical professional that you squat 100Kg chances are they will caution you against it. To the average guy that is good advice but to a fitness freak who knows what he is doing that is stupid advice. Avoiding strenuous exercise takes away only some of the risk, not all of it
The average guy on this forum >>>>> the average retail investor simply because investing well and making money is a priority for all of us. If that weren’t the case we would be doing something other than typing out long posts here on a Saturday evening
Those of us on this forum should aspire for results that are way above average because we are willing to put in the effort it takes. That means we have to deviate from conventional templates which is where my previous post comes in. I wouldn’t post what I did on a forum full of average retail investors
Since you gave some nice analogies which I can personally relate to, I wanted to add further to this. Squatting 100 kgs takes time. One needs to use the concept of progressive overload, ie slowly building up the load overtime. I bench press 80 kilos currently, but I didn’t start off with 80 kilos. I gradually moved up. The aspiration was always there to become a pro, still is. But just because you are in the gym surrounded by bodybuilders doesn’t mean that one should right away start with the weights that the other guys are lifting. One needs to understand one’s current capabilities and have a progressive mindset to evolve from that level.
Guys, for his age and experience, Nishant is a remarkably well informed investor…he wants to develop his own style of investing, over a period of time…and thats a very good thing for him to do…instead of forcing things on him, its better to leave him aline to learn the ropes of invedtment process…
What really attracted me to this thread was its heading…CONCENTRATED PORTFOLIO STRATEGY FOR THE NEXT 3 YEARS…
The short time period and focussed investment gives the impression of a theme based investment strategy…
From 2012 to 2015 in times of high interest rates, pharma, FMCG and domestic consumption themes have played out well…
We are now required to speculate as to which themes will play out in the next 3 years…i.e till next elections…
Some of the themes i can think of are
Digital india theme
Make in india theme
Swach bharat
Non renewable energy
Inland waterways
Affordable housing
Cyclical turnaround sectors
If we can focuss on one or more of the above themes and latch on to a few good stocks for the selected themes…then the pirtfolio will show good returns in the next 3 years…
Thats how i interpret the heading and thats what i am most interested in discussing here…
So i would like to invite @zygo23554 to give his views on investment themes for next 3 years…this will obviously require a top down approach to investing…
Bang on. First 4-5 years one needs to ensure that one doesn’t blow up, calls for discipline and some luck. No single mistake by itself should be able to finish somebody off, so minimize fragility initially. Once one has found his bearings it is time to have his own world view, figure out whats works best for him. As you said this takes time and dedicated, conscious effort.
Wish I’d started investing at your age, I would have been way smarter and better off financially by now
I have some horizontal themes that might play out well
Import Substitution - Trade protectionism through currency wars, policy action & higher duties I think will pick up speed over the next 3-5 years. Very tough to find data to work off this since this is a very broad theme, EXIM from the RBI site is a decent starting point but there on it’s not easy to latch onto specific ideas and go further
Converter business are likely to see a re rating - I am invested in APL Apollo, TCPL, Garware Wall Ropes and betting big here. Traditionally these businesses have traded below 15 PE but I think the 20 PE barrier will be breached soon backed by earnings growth and stronger balance sheets. There is value addition happening beneath the surface which the broader market may not immediately pick up
Themes I think that have already played out in terms of pricing in expected positives
Building materials - Sanitaryware, ceramics, plywood etc
Auto ancillary - Don’t see too many structural compounding stories here within my valuation zone. LGB has potential but I am still a bit skeptical (invested since 2015)
Themes that may be non starters for some more time (stock price may move but businesses may not be significantly better than is right now) - Capital Goods, Private Capex & Pure play cyclicals
Sectors I like to stay away from - Pharma, IT, Financials, Commodities
This thematic investment is akin to the Keynesian beauty contest…trying to judge how other investors will judge.
On a more fundamental basis, the P/ e multiple of NIFTY is already quite stretched…if the market has to move forward, the sectors which have not been cobtributing to the earnings should start doing so…and whichever ones among the now beaten down / loss making starts showing earnings…that is where the next few multibaggers will come from…
On basis of marketcap or P/ e …why is Pennar engineering preferable over Fedders lloyd…Fedders has turnover of around 600 crores from steel structures but has a marketcap of just 200 crores…whereas Pennar engineering has marketcap of 500 crores…
Incase of Digital India theme…Vindhya has only 300 topline from optical fibres …where as Aksh has a topline of 450 crores and huge capacity expansion coMing up this year…if the criteria is management…then why not Birla Ericsson from the same stable (Birla - lodha)…?
Why Pennar ?- Good partner in NCI , developing new vertical in Engg services, good order flow from marquee names, can expect large orders from warehousing cos once GST is done, low floating stock
Why Vindhya ? Birla is now subsidiary of Vindhya. Recently they bought out Ericcson. Vindhya quoting at low PE, product plus services co hence I prefer.
Would like to know your investment hypothesis in “future consumer” and “fortis”.
Kishore Biyani is again back to his old tactics of topline increase with scant regard for profitability. None of his business are profitable. He keeps on growing, acquiring, merging, demerging making balance sheet debt heavy and no profits. I thought he might have changed but he again shared his vision of reaching 100000 crores topline.
Again fortis ? even after 15 years of operations , no profits? Though SRL alone could be valued highly based on comparative valuation with Thyrocare & Dr. Lal. But core business ? r u expecting it to turn around? @rknshah
Biyani is now focused on Food, fashion http://www.btvi.in/videos/watch/2695/economicsurvey2016 , FCEL is back end of retails where FCEL will be manufacturing various private labels products supplying to retail owned by other future cos. New acquisitons like Nilgiri, Easy day, Sangam, Heritage will increase the reach. FCEL is also adding new products like Atta etc. I am betting that Biyani would have learnt his lesson and work diligently to recover lost ground. I am bullish on food business and so bet on FCEL.
Agree on fortis, but SRL is the incentive to buy fortis before demerger date. Fortis is now becoming asset light, India focussed and soon may get out of capex stage. So betting on fortis.
