Devesh's Portfolio Strategy and Construction

[DeveshGaur]

Hi, I am a 21 year old investor and have been part of the markets properly since March 2022, where I invested for the first time. However I was tracking what was going on in the markets since the Covid Fall.

I think investing is something I enjoy a lot, but I don’t want to overspend time on investing right now so that I can focus on my career more. Hence I am trying to craft out the best kind of systems that allow me learn more about this field and decision making here on a small capital base, so when I do have a bigger capital base 20 years down the line, I can be making good decisions.

For the last one year, on a small capital base, I generated about a 20% return which primarily got accelerated due to the recent run up in the small and midcap space. While analyzing this performance I was certainly happy with this outcome but I felt there were a few problems with the way I was approaching the game and I could have made better results had I made a few right decisions.

Some of the things I believe I should fix are:

1. Criminally low allocation on some high conviction and performance ideas: I held Equitas Hold Co from May 22 levels when the valuations were very depressed but the allocation I had in the company was only 2-3% of my portfolio size.

The thesis on Equitas HoldCo combined three powerful factors:

I. A sector going through headwinds and pessimism that was showing certain good offshoots

II. A special situation which could add to the normal sectoral returns.

III. A Tier-2 financier at the starting of the cycle and with a smaller market cap that had a big runway for growth.

Sectoral moves can have an outsized effect on the smaller players in an industry. It has become more clear to me over time why people emphasize sectoral tailwinds so much.

A new system which I am looking to develop now should have better allocations for ideas that fulfill criterias like this.

2. High Allocation without proper Research: I had very little knowledge about pharma when I picked up Laurus Labs and made it a big allocation. My idea was that the CDMO business looked interesting and Dr Chava seemed to be someone who many of the people held in great regard. I suffered as a result of this, and this has been the only stock in my portfolio which hasn’t generated a positive result on the P&L.

3. Too many stocks to track: Because of my habit of tracking several industries in an attempt to understand broad markets, I put several stocks in my portfolio, at the peak there were about 20 in my portfolio, which made it difficult for me to track the ideas and their performance. This isn’t good because a lot of moving factors start to influence your portfolio and the only chance you have at a good return is that the market itself starts to perform really well, pushing everything higher.

To fix these three problems, what I have looked at doing recently is the following:

1. Maintaining a Satellite Portfolio: I have opened a separate Demat Account where I aim to buy smaller quantities of all stocks I like the initial ideas about, they can be from different sectors, can come from different people I follow for ideas in the market like @Worldlywiseinvestors @harsh.beria93 @basumallick @ankit_george , but the trick is to keep all these stocks upclose so that I can be motivated to study them properly in a manner that makes me appreciate the upside properly but more importantly makes me understand the downside to the stocks. Once I gain confidence in the ideas, they can be transferred to the main account

2. Minimum Allocation Limit in Main Account: In the main stock account, I am looking to maintain a minimum allocation of 10% to the high conviction ideas, this would reduce the number of stocks down to 6-10 which would be easier to track for me and would provide diversification.

The problem with such high allocation is that I want to protect myself from a downfall, so the ideas that make the cut should also make sense on a valuation front, I should be sure to not lose more than 30% of my capital. A strict stoploss from technical analysis can be adopted here to cut losses.

I think doing 2 alone would help solve both small allocations for good ideas and large allocations for bad ideas.

This is the broad idea that i’ve formulated for my portfolio strategy, in the next post would share my portfolio ideas with the community too, to give you a better sense of what kind of investor I am.

I would appreciate feedback from the community members simply because I am really new to this entire field and I think there is a lot I can learn from the members of this community.

[ChaitanyaC]

While the pursuit of profitable trades is why we are primarily in the market, which also acts an incentive going forward, considering your age, the focus you want to have on your career, and while I do understand your enthusiasm and spirit, and while I do acknowledge the feeling of making bigger profits at a young age, I would say not to bother too much about the numbers, the allocation, the profit, at this stage, and create a process, a method by learning and experiencing.

And as you go forward in life and career, with the understanding and experience you gain, you can allocate more and reap bigger profits, core, satellite or any other, the losses will be fewer and the gains will be more.

Even if you are passionate, and can handle the pressures of allocating time, and can put in the effort, even to the point of sacrificing some joys, and are inclined to make it big quicker than others, don’t look at the decisions from numbers alone, look at them in the context you have taken those decisions.

I get this feeling too, for the stocks that have risen more than my expectations. What if I had allocated more to this stock, it doubled in less than a year, why didn’t I allocate more, if I had allocated more I would have make double the profit, I did not allocate more because I was afraid of losing more if loss happens, maybe I couldn’t afford such a loss, or I was not comfortable with such a loss.

If you actively participate in the market, and when you look back after a couple of years, I am almost certain you will not be in agreement with all the decisions that you are taking today, you may even find holes in your thought process that you have today. Learning and experience in the market will eventually make us take better decisions as we go forward is all I am saying.

[ankit_george]

Hi Devesh,

First of all, kudos to you for being active in the markets in your early 20’s. Compounding is a powerful weapon, and the earlier you get going, the better things will be.

Also, I am glad that you’re being open and honest about your experience with pharma. On my end, if I invest in a company with limited research and it goes up, I do not consider it a win. If I do the research and it climbs, but not because of the reasons that I thought it would, it’s still not a win to me. I personally only consider it a win when the points in my thesis were the reason why a stock moved up in value.

I like your two step strategy (satellite portfolio + main account with just 6-10 stocks). It’s a smart way to track, analyze and filter out companies. Over time, you will get better at screening companies, and you will get a better idea of the kinds of companies you would want to invest in. The high level qualifiers that I use are below:

• They have to have the ability to move up in weight class (micro to small, small to mid, etc.)
• They have to be in a sunrise sector (ER&D and renewable energy versus steel products and packaging)
• They have to have a defensible moat that’s ideally primarily grounded in unique technology. Other than that, the moat can be strengthened with good execution calibre, superior distribution, and platform/ecosystem potential

I do not maintain a satellite portfolio, but I track a handful of companies, and similar to your main account strategy, I just invest in 6-10 companies.

[DeveshGaur]

Thank You for the feedback and the incredibly useful advice. I feel that the most useful skill that somebody like me can learn from investing at this age with small capital is decision making. And I’ve thought about documenting the context in which I am making my decisions at several times, and to put that into practice, I started an investment diary recently. I do not try to include any numbers or allocation there but try to put into words why I think I made a certain decision. It is an exercise that is purely intended for self reflection, but I hope to reach a point somewhere down the line where I can look at it and think that I was really wrong about how I was approaching several things.

Looking forward to receiving more feedback from you below.

[DeveshGaur]

Hello Ankit, thank you for your reply. I have been following your threads and writeups for some time now and it is really good to hear from you on this thread.

I think I’ve had several experiences where stocks I have selected have gone up even though I didn’t have a very clear thesis on them. Looking back, I have been lucky with several of such investments and I think that not having a clear thesis is one blindspot I want to overcome and that is why I’ve decided to put my portfolio out for review on a platform like VP.

I like the qualifiers that you use as they are very similar to the broad framework I have created for myself. After reading about the framework Rakesh Jhunjhunwala sir used in the later part of his career, I’ve come to appreciate several similarities that exist in his approach with mine too.

I think anybody who is as interested in the Indian Economy dynamics as I am because of my Undergrad in Economics would prefer a similar framework albeit I believe there are specific blindspots that I can appreciate myself here too.

The broad idea I use is below:

1. Strong Tailwind in Industry: Industries that are bound to see greater demand in the because of either the policy environment or because of long term economic and demographic changes in the economy interest me. I don’t think it is an economic perspective that guides me here, I think in an Economy like India demand is never really an issue, it is the consolidation of supply that is much more instrumental to higher economic returns. But I get interested simply because I get excited by these plays and how the future can be different from the past.

So I have invested in a Senior Care Play, Invested with a company providing niche components for nuclear energy and space along with defence and have also been reading about the electronics value chain and what is happening there since the PLI introduction in 2021.

2. Indication of Smart Money Cornering: There are a few investors I follow through the bulk deal data, if I am evaluating an industry and I see some evidence of their presence there, I double down on my efforts at studying the company. Some of these people are Kenneth Andrade sir, Matthew Cyriac, Zaki Abbas Naseer, Mukul Aggarwal. I also look to see if there is some sort of Preferential Allotment or any such corporate action happening at a company which could see sophisticated investors entering the picture. It is a confidence boosting measure which tells me that some kind of detailed due diligence would have been done on the firm, which I as an individual have limits to do myself.

3. Build Up of Potential Operating Leverage: If there are several investments I see the company has been making which haven’t really yielded results, I get excited, simply because I feel like all that will only add to the benefits we get to.

4. Execution: I try to see competitive advantages in a different light, I think that for smaller companies where I do invest, it makes a lot of sense to see if they have successfully been able to get themselves out of risks that a small business faces in scaling up. While increasing market share, stable margins do play a role, but I also tend to emphasise on experimenting with the markets and finding a way around the big players.

I will try to detail my portfolio in the next post just to give a better colour on how these decisions actually come to real life. I have been taking time with that post, simply because I do feel like there are still a few stocks in my portfolio which I don’t have a very good reason for keeping there, perhaps writing about them here would help me face my bad decisions.

[ankit_george]

I really like the framework you’re using to sift through the universe of publicly listed companies.

Personally, I need to add indications of smart money cornering to my approach as well. Like you correctly pointed out, there are limitations to the level of research and analysis that we do as individuals, and seeing more established and respected investors entering a stock is always a good sign.

Regarding the bit about strong tailwinds in the industry, I have to admit that I am constantly learning over here, and that I need to do a better job at keeping tabs on things. For example, with the rise of battery storage systems, I figured that India’s renewable push would be primarily focused on solar energy, and wind would be a thing of the past. As anyone who has been keenly following the renewable space knows, solar+wind hybrids have much better economics and a more favourable daily power generation profile versus solar only installations. Anyway, the point here is to constantly keep tabs on things, and to not marry oneself to a specific thesis that may have become outdated.

[DeveshGaur]

Hi Valuepickr. Got a little inactive on the thread because I started my first job in July. It is a very interesting experience getting a monthly pay after spending a lot of time as a student. Suddenly your portfolio becomes larger every single month . I’ve been saving almost all of it, to put it back in the markets. But haven’t deployed much yet because I’m afraid the market is in the top quartile of valuations.

To follow up on market breadth, I’ve been using The Wrap by @Tar . A really helpful resource. Not only for the market breadth but also for the corporate announcements. I make it a point to read it religiously every weekend. I also try to track bulk deals at days end. These two have been largely the sources of my new ideas.

In this post I’ll just lead you through a few of the new ideas I’ve discovered and invested recently. Before going into this, I just want to remind you that I’m only about 30% invested currently. The market valuations don’t give me a lot of confidence.

The first idea I’ve invested into is Styrenix Performance. It came into my radar when one of the investors I track in Bulk Deals, Suresh Kumar Agarwal invested into the company. One of the triggers I could immediately identify related to the company was the fact that its directly related to the auto sector. With some pickup being in the segment, I felt the investment started to make sense because of the low PE the company trades at and its cyclical nature. @Worldlywiseinvestors has drilled into our heads as SOIC tribe members that sector/factor moves contribute 60% of the upmove in a stock. This is frequently the first factor I look at when investing in companies.

Another good thing I saw with Styrenix was a corporate rejig, whereby the old promoter had returned to the company and had announced an ambitious capex. Corporate Rejigs, End Sector momentum, Capex all individually are very strong triggers for a company, here I saw all of them happening at once in a company, where an investor I respect had entered already. This was an amazing thing to look at.

The second stock idea I invested in is Arvind Fashion. I had read about the company about a year back when I got to know that the retailer in India for several fancy brands was selling at 1 P/S. The fact that Ashish Dhawan, Ashish Kacholia and Akash Bhansali had invested in the company already gave me the confidence for it being a sensible value stock. But then the underperformance made me realise there had to be trigger that could act as catalyst to capturing the value.

So I didn’t take a position in the company a year back. But when recently I was going through The Wrap, and I read about Arvind selling its Sephora business to Reliance, I realised the debt could come down from it. The fact that they had sold the company at a very cheap price, sounded even better to me (you want the richest person in the country to feel like you didn’t fleece them), this prompted me to invest in the business, in the past two weeks it has shown a good performance, but I feel at 1.25 P/S it is still undervalued. The catalyst here will be long term actions of the management, I’m still not sure if they can engineer the turnaround, which reflects in the kind of allocation I’ve made to the idea.

Would love to know your thoughts on the process here, or some extra points of research you can point me towards with respect to these companies.

Look forward to interacting regularly on this platform.

[DeveshGaur]

Both the stock picks I wrote about here in November have done well, as have the broader markets. But there is a set of learnings I want to share from these two picks which I am trying to articulate for my portfolio as a whole.

Styrenix: Since stock picking is a probabilistic sport, when you see multiple factors moving together along with a certain kind of pessimism because of surface level reasons, it is probably time to load up on the stock. Here, the demand scenario is still in favour with the auto industry restarting its performance, the management change brought a lot of efficiencies as demonstrated by the results, and there are additional capacity plans which are always interesting.

The surface level pessimism here was because of the promoter pledging and past governance issues. Remember a promoter has to take money from somewhere to get operating control back of a business they sold to an MNC and the governance transgressions happened at the time of the MNC promoters. Added to this was the smart money cornering. I think this stock hasn’t seen its potential yet, a better picture would emerge as the results for the company come back which can see re-rating here.

Arvind Fashions: Good investors were here, it was a recognised value stock always as I pointed in the write up above, all it needed was an event to change its perception to being the high growth company. The Sephora deal happened and still for some reason many people were skeptical, but this is where opportunities exist for investors like me.

Institutions take time to get to the bottom of events, for the people working there it is a job which pays you to do a Mon-Fri 9-5. For opportunity seekers, the motivations are completed different.

Now there is greater institutional coverage and research coming out on the stock, but I believe the results would be the main driving factor here. If the results are good, it can see good valuations, if not it will go back into a longer period of consolidation.

I’m slightly more skeptical of Arvind Fashion than Styrenix, but I’m sure that even through this there will be a learning I’ll have as the markets are the best teachers.

Attaching a note I saw on Arvind here.

Again the important thing is that this isn’t a buy or sell recommendation, higher equity prices make me scared about whats to come and I’ve done adjustments at the portfolio level accordingly. Also with a high interest environment all around us, it is very plausible to meet our financial goals through other instruments. Let’s not get overtly optimistic or keep expecting something which has a very low probability of happening.