Gagan PF- Need Allocation advice

Q&A: Questions & Answers Portfolio Q&A
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Dear VP’s,

Thank you for this wonderful community, where newbies like me can seek genuine advice which is not distorted by any incentives.

Below is my risk profile & financial situation: as I think without knowing risk profile, the advice might not be relevant.

Profile: 31 years old Engineer, Father of a 2years old son, working as a consultant with telecom vendors, saving a decent amount on contractual basis which is usually for 6 months extendable contracts, I never worked as full-time employee as I came to know early on that contractor make more money than full-time employee with some risks, which I was happy to take.

Risk: I may lose job any time, currently have visibility of next 6 months only, also the telecom market is in a structural downturn, so I really don’t expect to find any contracts after 2-3 years, though I intend to work more 4years.

Financial setup: Already made a new home, bought some land worth 1cr at the peak 2014, which is now worth much less(Was my biggest financial Mistake), I intend to sell it.

have a total of 2.2cr of financial saving, out of which 1cr is invested in equities, rest is in FD+ Liquid funds.

Objectives and Target: after 4 years, I expect to have a total of 1.7 to 2lc spending each month, I know it seems quite high with respect to my capital base.

I started investing in equities since 2016, CAGR is decent(24%) not great, it’s lower due to a lot of churning I was doing, I sold my full PF(30 stocks) in Jan 2018 due to valuations concerns and bought single stock Shemaroo and in March 2018 I bought few other stocks as per below details.

Current Fresh Equity PF:
Stock Name: Allocation %age, Avg Price, Type, Brief thesis.

  1. Shemaroo: 35%, 440, Core-Long term, Digital India growth play, Business protected by Ownership Rights of movies, increasing cheap 4G penetration is a huge plus, a high leverage business with tailwinds(demography + cheap data)

  2. Reliance Capital: 30%, 425, Non-Core, Contrairian value buy for short to medium term, Anil Ambani group’s crown jewel reserved for next genration(Anmol Ambani), all other co’s in Anil’s kitty did poorly, But all the business in reliance cap(RNAM, R Genral Insurance, Life Insurance, R Money) are doing well and in tailwinds as well, Value buy at 0.6x of book value, + non core investment worth more than 10K cr’s which is almost equal to market cap, they intend to monetize all non core investments.

  3. Wonderla: 7%, 360, Core-Long term, Consumption theme, New generation like me don’t like to spend money on things, but we do spend money on experiences, which is basic theme for this investment, but allocation is low, as I am not sure of the price to pay, business valuations seems high, will keep adding on dips.

  4. Take Solutions: 5%, 165, Core-Long term, Niche IT Co in Life Science business, legacy business is dying.

  5. Thyrocare tech: 4%, 591, Core-Long term, Wellness Industry play: lowest cost service provider with high margin, large opportunity size, and passionate promoter, looking to add further.

  6. SREI Infra: 3%, 75, Non-Core, value buy just waiting for SREI Equipment IPO to come and may exit.

  7. ITC: 2%, 260, Core-Long term, Stalwart, the consistent performer, evaluating to see if it’s better then FD, Liquid Funds.

  8. Rest are equity mutual funds.

Concentration on first 2 names happened naturally, as I could not find relative better options, as the whole market itself looked a bit expensive, also I didn’t wanted to completely exit market, so concentration is where I think there is a margin of safety.

Now my main question is allocation related:

  1. Currently, I am allocated roughly 45% equity & 55% debt, considering my profile(age,risk profile) & target, shall I change the allocation more towards equity? in what balance?

Options:
A) All fresh income + debt income----> Equity, I can keep allocating additional income back to equity, whenever I find opportunity, that means stopping any further debt investments.
B) Are stalwart co’s like: ITC, Pidilite, Marico a better option than debt(FD, Liquid funds), in my case.
C) Tail risk hedging: shall I try to allocate more to equity, and try options for hedging tail risk, as some experts suggest, although I like simple things, don’t really understand how these options works, but keeping alternative open.

all of your suggestions and feedbacks are valuable for me, please point out flaws in investment thesis also please suggest for allocation.

Thank you!
Best Regards,
Gagan

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Interested in understanding your line of work. Since you said you save ₹25L for 6 months, even assuming a savings rate of 50% (Which is high), it looks like you are earning close to ₹50L for 6 months, which translates to ₹8.33L per month and ₹1Cr per year.

This would put you in the top 0.0001%+ of the salaried class in India. Even CEOs don’t earn that much.

Just curious.

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I don’t work in India at the moment, the saving rate is more than 90% as all major costs are taken by the company, i only pay for my food, avg monthly rate(take home) is around 8k-10K USD for my profile, its niche tech job, you can google more about ‘Intelligent networking’.

Rest I am looking for advice on asset allocations, discussion on the same is welcome!

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Hope the thread doesn’t get more interest in ‘Intelligent networking’ than making your portfolio ‘Intelligent portfolio’. :grinning:

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Ah, make more sense now. You mentioned that you needed financial freedom and all I could think of was how many people would consider having that much in Savings and Assets as financial freedom achieved.

Let’s carry on with the thread.

Especially interested in your investment in Wonderla. Wonderla was one of the earliest companies I started tracking, ever since it appeared as a Case Study in one of our Corporate Finance classes. I had it in my watchlist for a long, long time without ever looking at it. Once I did a Ratio Analysis and some basic research, I was forced to remove it from there.

Wonderla is what Ben Graham calls a “Frozen Corporation” in ‘The Intelligent Investor’.

“There is a class of business where the eventual “cash back” part of the equation tends to be an illusion. There are businesses like that – where you just constantly keep-pouring it in and pouring it in, but where no cash ever comes back.” - Ben Graham.

The simplest manifestation of this can been seen in the huge divide between the company’s ROCE and CROIC over the years. Or like this:

Wonderla
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Okay, maybe Wonderla isn’t exactly an example of a ‘Frozen Corporation’, but it’s in a deadlock. See how the Sales is very sensitive to new investments. When investments are flat, Sales drops. When investments spike, so does Sales. So, in reality, the company’s reported profits have come from mostly installing newer and newer rides. And ripping off customers when there is demand. Is this sustainable? Not really.

I would be happy if Wonderla proves me wrong by stopping new investments and still managing to attract new customers. Wonderla is an unconventional business, the type of businesses I actively seek in my investments. But instead of building a brand, they’re just, well… building. Look at how Disney became successful. Wonderla would do good for itself and its investors if it starts genuine brand-building exercises to attract customers. Whatever it is doing is not going to last for long. As Warren Buffet once said, “If you’re in a hole, the first thing you should do is stop digging.” Wonderla has dug itself into a deep, dark hole since many years.

Most investors here in VP are interested in companies with huge Capex in the prior years, because it signifies growth ahead. Wonderla might be their most favorite company in that case, because the Capex never stops and the growth potential is infinite (Sarcasm).

If you would like to understand this phenomenon where companies keep investing more and/or increase prices to produce profits, read this wonderful article by Prof. Sanjay Bakshi:

Ironically, Prof. Bakshi himself was an investor in Wonderla. He exited after two years though, something which he almost never does. Even the best make mistakes, I guess.

Edit: As noted below, Prof. Bakshi is still invested in Wonderla. My bad.

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Hi @gagandeep

While capital allocation is a function of ones comfort level and conviction in the business prospects, I would be uncomfortable having 65% allocated to 2 cos. There are many moving parts and unknowns esp in the industry shemaroo operates in. The other one is finance where you have another large allocation. Both these industries are not known for their corporate governance and certainly not for their book-keeping standards. To have such large allocations is not prudent in my view and there is room for diversification without sacrificing the benefits of concentration. Wonderla is a great company with lots of operating leverage. In my view, incremental sales will drive disproportionate profit growth and you could look at increasing your allocation to it. The rest I don’t follow. All the best
Bheeshma

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Who said prof Bakshi isn’t invested in Wonderla? Have a look at the March shareholding findings. Valuequest still holds 2%.

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My bad then. My argument still holds. Unless and until Wonderla can genuinely increase Sales without the support of extraordinary Capex or increase Profits by adjusting its Prices, I would be very unconformable buying it.

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Probably. But the sales mix is changing. So sales will grow though not significantly even if the number of visitors remain stagnant. Also Hyderabad park hasn’t yet achieved the numbers of Bangalore or Kochi park yet in terms of the number of visitors.

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I’m not interested in understanding by how much the Sales/Profits will grow. I’m interested in understanding how the Sales/Profits will grow. As it stands, Wonderla’s Sales have grown by newer installations of rides and Profits by ripping off customers during the on-season. Both of them are not sustainable.

If Wonderla makes a turnaround and starts investing in Brand Building rather than Buildings (Pun intended), that would be wonderful. Currently, you can clearly see from the above graph that Wonderla’s Owner’s Earnings has hardly seen any kind of growth over the past several years.

Is the company approaching a Red Queen effect? Hard to say. Is the company in a deadlock of reaping money into their company to support Sales? Definitely.

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@gagandeep,

Looks like, you already have created a solid base for achieving your goal of financial freedom. Financial freedom is a function of one’s lifestyle, aspirations and wants. So, there is no definitive answer about what is enough to make one financially free. However, ballpark, my experience is that generally, 50-60 times your annual expenses is a good number to start with the logic that average dividend yield shall take care of one’s expenses. On the other hand, even if you park that amount in safe instrument, returns are more than sufficient to meet your expenses and there is some extra money to plough back. Thus, the capital base will continue to grow and so will your cash flows.

Given your job profile, age, networth, risk taking ability and aspirations, I feel, the equity allocation is on the lower side.I Having said that, given that your cash flows are uncertain beyond contract period, it may be prudent to have liquid fund that can meet your expenses/liabilites for couple of years. Hence, as you indicated, It may be a very good idea to move some money from debt to high quality compounding businesses as and when market gives good entry points. I am sure, over a period of time, the returns from that can be much higher than debt instruments without having much risk of capital erosion. It especially makes sense since you want to be financially free in medium term.

Without getting into portfolio stocks, I feel the high concentration level in two businesses may not be prudent from risk management perspective. The only reason I am saying this is that I have realized over a period of time in market, that irrespective of how convinced one is about the story/ facts/data points/ hypothesis - there are always factors that are beyond anyone’s control or are not factored in the initial hypothesis. If any such scenario plays out, high concentration can create havoc on the return and also cause you sleepless nights. My suggestion is, slowly, trim it down to manageable levels.

Dislosure: I am not an investment adviser and/or financial planner. Please consult the investment adviser/financial planner to get the professionally qualified advise.

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Dear @desaidhwanil/@bheeshma

Thank you for highlighting the risk! I do agree that I went beyond a reasonable concentration.

As Howard Marks said, ''there are bold investors and there are old investors, but there are no bold old investors" I also believe that in the learning curve, market, experiences, and age will tame boldness and will make most investors humble and less aggressive.

But on the contrary, sometimes I think in a fairly priced to elevated market, fresh diversification lose its benefits, as you have to pay higher mostly in such market, so concentration naturally happens if you are price sensitive.

Also, I find most big investors were aggressive when young and during their capital building phase, my plan was to keep at least 1 aggressive allocation in PF for no1 business, which is what I did with the Shemaroo but as you highlighted I do sense the risks and will trim slowly as I get a good alternative’s.

Reliance Captial: this is a non-core investment, a short to medium term contrarian bet, where I think there is a lot of margin of safety, and I may get to exit near reliance general insurance IPO, even if this doesn’t play out I will trim this position in short to medium term depending on alternatives available, as going forward, I believe markets may give good entry points due to political uncertainties.

Rest as you suggested, I will allocate more 10% from debt to equity towards consistent performers like ITC.

Thank you!
Best Regards,
Gagan

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Posting Updating PF: last 2 year has been a good learning experience luckily didn’t lost much in correction thanks to the timely advice I got on this forum…! :slight_smile: have been reading a lot and tried to revamp pf as per my own requirements, below is updated setup, almost 50-50 in both equity & debt side. debt is tax efficient for me since I have no other income in India, and using multiple family accounts.

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Cement basket was 20% till recently, reduced to 16% as prices ran up (existed orient cement), and replaced with Apex & Avanti, I may reduce cement further depending on price movements.

Rest as I realized I don’t have much understanding of financials yet, better to have hand-holding from a reputed PMS, so 40% of the equity portion is with PMS, I look forward to seeing how my PF perform vs PMS over 3 year period, as mine stocks are totally different then what I have in PMS.

Also, I don’t intend to keep debt at 50% allocation, all income from debt + monthly salary will be added back to equity, so over time debt %age will go down automatically, finally, now I intend to invest regularly and hold on to stocks.

I look forward to having members suggestions and constructive criticism on the overall approach in order to refine further, especially on the debt part if anyone knows any risks of UP Power Corporation bonds, since its almost 40% of debt PF, as I found none apart from obvious inflation risk.

Thank you!
Best Regards,
Gagan

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Dear @gagandeep,

I think we had a quick conversation once on equity / debt balancing in another thread.

I bought a book which helped me make a fairly clear strategy on how to invest intelligently for the long run and I would like to recommend it to you. This book and the strategy it outlines works best with Mutual and Index Funds.

Best regards.

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Hi gagandeep,

Can I know which PMS you have chosen and why?

Thanks
Anil

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Just curious,do u need to pay tax
Tax bracket in USA is quiet high
USA taxes world wide income

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Hi Anil, for PMS i am invested with maximalcapital.com, regarding Why i choose this PMS: basically alignment of interest and investment philosophy, one of the most important thing in investing is ability to stay invested for long… with Maximal, 1st investment process is pure value oriented, 2nd fees are aligned on performance only… no fixed annual fees… , with most other PMS they have fixed fee + performance fee… fixed fees feel very bad in bear markets… so people tend to jump out of PMS in bear markets, where as in bear markets only you can sow the seeds for growth… that is why i chosen this PMS… also the fund manager Sarvesh Gupta himself is invested in the same PF, although i have decided to limit my allocation for first 3-5 years… after then will take call according to both process & performance.

@maheshkumar : i don’t work in USA… i just get paid in USD.

Posting PF update:
I have added below scripts to PF, in last few days, basically deployed 10% of additional capital from Bonds—> Stocks + incremental cash from salary.

Additions:

  1. Aditya Birla Capital 4% position avg price 87
  2. Aurobindo Pharma 2% position avg price 548
  3. KingFa science & tech 1 % avg price 605
  4. L&T Finance 2% position avg price 103

Rest i added to current positions of Godrej Consumer, Acrysil ,Tata Steel.
also added to cement basked and increased allocation to both NCL industry & APCL.

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