I have been reading up a lot on the Valuepickr forum and selecting some stocks basis the discussion and some from personal view/choice. I invest a specified amount of money every month in the 25 stocks that define my core portfolio. To guide me in buying how much of shares of a particular company, I have developed a methodology for which I want the forum member’s view.
I am attaching the sample calculation for the past two month for easier understanding and my current portfolio. As a summary of what I do here is a short summary
- I prefer Cash earning rather than accounting earning of the company
- I use Price to CEPS to calculate the weight-age of monthly amount allocation
- I have a defined amount to monthly investments, and using the weightage I compute the money to be invested in a particular company
- Incase there is any balance left over from previous month (rounding delta), I add it to the calculation and compute the shares to be bought
It has served me good (i assume) for the past 12 months, but i guess due to high price of some of the stocks (BlueDart, Bosch) I am not able to buy those shares.
I need help from the fourm members in the two areas:
- Does the calculation methodology makes sense (@Donald had started a thread on how to allocate money, but then there are differences related to division basis conviction in the stock, and my monthly investment)
- Do i need to tweak the methodology to be able to invest in high priced shares (BlueDart,Bosch might be expensive P/CEPS basis, but other stocks just coz they are working on a small equity base would be ignored).
- Views on the shares invested in
Divyansh Gupta_Stocks.xlsx (26.6 KB)
Interesting concept. Aren’t you trying to boil the ocean by doing all this activity?
- 25 stocks will tend to resemble a mutual fund. If you don’t have any conviction on the stocks you hold, better SIP into a good diversified mutual fund. Try to study and build conviction in your holdings so that you reduce the number of stocks you own.
- Start off with a equi-weighted portfolio - e.g. if you have 15 companies, divide your monthly corpus by 15 and invest it equally. Then each subsequent month repeat the same thing.
Keep things simple.
Personally 25 stocks is too much IMO. If you can limit it to 15 high conviction and relatively high margin of safety stocks, you will have more money to allocate to each stock.
Also, rather than dividing your money every month, why not divide per quarter. That will give you more funds per stock to allocate and may enable you to buy relatively expensive stocks.
Quarterly allocation of money will also allow you to time better, if you like charts and technical indicators.
I concur with everyone’s view of 25 being too many. Most of the diversification benefits can be achieved by having a portfolio of 15 stocks. Besides that I can see some stocks having significantly higher weightage which means who have more conviction in them. I would also suggests removing the stocks where you have allocated only 1% or 2%. Also I am not too sure about prospects of powergrid
Your portfolio does consist of some proven multi-baggers.
The essence of discussions portfolio allocation in this forum is to “To pit each of the business in the portfolio against each other and to able to explain at any day why you are allocating more to one than the other even to your wife”. Moreover, other powerful approach - one should be able to crisply summarize why a new stock should be added to the portfolio, than allocating the amount to the existing stocks? This will curtail building up a long tail in the portfolio.
You may want to read Capital Allocation framework and Business Quality threads for more inspiration.
Thanks @basumallick @NikhilJain @Vpayasam @Rokrdude for your inputs.
@basumallick: Agree that 25-30 stocks resemble a well diversified mutual fund, the problem with equi-weighted investment, is that it doesn’t gives any value to the current valuation of the stocks, where as atleast in my method, I give higher weightage to the stock which are relatively cheaper among the 25 odd stocks
@NikhilJain: Dividing per month or per quarter would give me the same amount of money, and therefore wont change the monetary allocation. The reason for monthly investment is that I put a certain portion of my salary into stocks every month, and to avoid timing the markets, I invest every month on a fixed date (post my CC bills are paid off).
@Rokrdude: for the ling tail of the stocks, I recently started buying into these companies, and therefore the allocation to them is lower at 1-2%. As time goes on the concentration might change (at one point of time ITC was 40% of my portfolio).
For Power Grid, though I agree with the issues in India power sector and all, if one sees their results basis on the cashflows, the ratio of Cash Flow from Operations: Cash Flow from Investing is improving, and the cash flow in financing as a ratio is also reducing, and their topline is growing at 16% in the past 4 years, so it might not be a mutli-bagger, but its a cash generating business which might be a steady performer. Your views are invited
@Vpayasam: Will read up on the Capital Allocation Framework and Business Quality threads.
Thanks again to all for their inputs.
I believe you misunderstood what I am saying. Or perhaps it is the other way around.
Anyhow, I’ll still explain what I meant.
Let’s say D invest Rs 15k on 15th of every month, in stocks. So D invests 45k per quarter and 180k per year in stocks.
Now, D decides to invest quarterly instead of monthly. So D can now buy any stock under 45k price. IMO D should invest in stocks where best returns are expected in near future, whether the stocks are relatively cheap or expensive.
If D is fixated upon doing SIP in all 25 stocks every month or quarter, he is moving away from the Lynch methodology. Remember, Peter lynch had more than 1k stocks in his portfolio, but he kept shifting money where he expected best returns in the near future.
Thanks @NikhilJain, got what you meant.
For your point of changing the stocks where I think there would be best/better return, doesnt it automatically induces one to bring in the bias of either favoring a s stock close at heart, or to choose a stock that has run up. In order to avoid this bias only I had gone to this long approach of calculating which stock to buy, and do it every month, not questioning the methodology of Peter Lynch, but then I am not sure that I can remove personal/emotional bias as well as he did.
Also I have been buying shares since 2012, and haven’t sold any of the shares that I have bought, since I am not into opportunistic buying and selling, and therefore the monthly SIP thing, just to remove my bias.
Would love to hear your views on it.
I have realized, in whatever little experience that I have, that being able to pick good stocks is not the only criteria to maximize gains on your portfolio. Capital allocation also plays a very significant role in it.
When I talk of shifting capital among the stocks in one’s portfolio, I imply that one should do so in a completely non-biased manner.
For example, I bought suven life sciences around august 14. My average price was Rs 123 and it formed 40% of my portfolio at that time. By march 15, it was trading around 320 levels. By all means, I should have been in love with the stock. But I believed that it was running ahead of its fundamentals and I sold all of my holdings in SLS and bought Nandan denim below 60. You should check at what price both of them trade currently.
I’m not implying that I’m correct all the time. I’m also not saying that you should trade more often. I’m just saying that, I would have my money in the stocks where the story is playing out currently rather than in the stocks where I can sense a considerable pause in the story.
Disc - This is not a buy/sell recommendation. Please do you own due diligence before making any decisions.
That’s a very nice way of thinking.
I am not so sure personal investing is cookie cutter “one size fits all” kind. Although I tend to stick to 15 or so stocks, I understand that some one may be more comfortable with 25 or 30. You should invest as per your temperament and comfort level. Great investors like Schloss had more than 50 stocks at any given time and that did not impact his performance for 50 years. The professional money managers investing in small and micro cap stocks routinely practice wide diversification due to inherent volatility seen in these businesses. people practicing deep value investing may have more diversification than very long term moat investors. Some one may start with 25-30 stocks and over the years may come down to 15 or so if he becomes comfortable. Even if stays at 25 he may make good money. It is individual’s choice and call.