Gurjot Portfolio

Q&A: Questions & Answers Portfolio Q&A
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Almost 3 years since my last portfolio update and wowie what a ride it has been! From the highs of Jan 2018 to the depths of Mar 2020 - gotten some first hand lessons of

  1. How a market frenzy and bubbles are getting formed (Bitcoin, SME IPOs at 30-40x valuations)
  2. Perils of micro and small-cap investing wrt valuations
  3. Extremely dangerous sectors for investment without enough research and knowledge (read Financials - ILFS default, liquidity crunch, NBFCs blow up terminating with Yes Bank reconstruction)
  4. Completing graduation with market crashes - what it feels like psychologically and emotionally to see day after day of waterfall like plunging markets - March lower circuits anyone?

As Ian Cassel says - Investing is a lifelong education and its teacher is loss.

And talking about loss, I’ve had my fair share of participation in all the above market lessons (Lasa Supergenerics, Secur Credentials, Yes Bank amongst my biggest losses along with few other financials Piramal, MOFSL, etc. with somewhat bearable pain).

And somewhere along the journey, this happened last year to significantly change my style of investing

Reading Saurabh’s book also helped me think a lot more about keeping in mind specific financial objectives and goals investing with. The book provides access to Ambit’s financial planning tool, where you can put in your/wife income (along with expected annual increments), annual category wise expenses (adjust for future inflation), recurring / non-recurring life goals (house, car, vacation etc etc.), secondary sources of income, etc and then calculates what CAGR% you need to generate to achieve those financial goals.

And for me the magic number was 13.4% compounding for the next 10-15 years.

So from November till now - I’ve been busy trying to build a Coffee Can Portfolio to achieve those returns at least from the next 10 year perspective as per the Coffee Can Method. I’ve actually got a mental target CAGR of 15% for 10 years which makes the initial x capital into 4x.

So sharing my Coffee Can Portfolio from 10 year perspective (I don’t plan on selling any of these stocks for the next 10 years. However planning to add wherever allocation is low/conviction changes) unless:

  1. Unfavourable management change (could be HDFC Bank)
  2. Consistently deteriorating fundamentals over 3 year period or rapidly changing business model / environment
  3. Stock runs much much ahead of fundamentals 100+ P/E for <5-10% growth
  4. Achieve 4x target before 10 years (Ex: If stock goes 4x in 8 years - sell and put in fixed income to generate 15%+ returns over 10 year period)
# Symbol Buy Avg P/L % Allocated % Current %
1 NSE:BANDHANBNK 424.9 -41.6% 10.60% 6.38%
2 NSE:INOXLEISUR 300.5 -22.1% 7.84% 6.29%
3 NSE:ICICIBANK 285.9 25.0% 4.60% 5.94%
4 NSE:ICICIPRULI 335.0 15.2% 4.56% 5.41%
5 NSE:HESTERBIO 1503.5 -19.5% 5.25% 4.36%
6 NSE:KOTAKBANK 1193.0 16.1% 3.52% 4.21%
7 NSE:VMART 1678.1 -0.2% 4.00% 4.11%
8 NSE:HDFC 1830.8 0.1% 3.94% 4.07%
9 NSE:BERGEPAINT 430.8 20.5% 3.13% 3.88%
10 NSE:PAGEIND 18719.2 6.7% 3.40% 3.74%
11 NSE:HDFCLIFE 447.1 12.3% 3.14% 3.64%
12 NSE:HDFCBANK 990.2 3.3% 3.37% 3.59%
13 NSE:ICICIGI 1062.0 19.8% 2.89% 3.57%
14 NSE:DIAMONDYD 452.8 37.2% 2.49% 3.51%
15 NSE:POLYCAB 864.8 -12.7% 3.63% 3.27%
16 NSE:BAJFINANCE 1874.9 29.1% 2.34% 3.11%
17 NSE:ALKYLAMINE 1154.3 76.7% 1.44% 2.62%
18 NSE:TCIEXP 581.0 13.3% 2.24% 2.62%
19 NSE:MASFIN 702.5 -9.4% 2.79% 2.60%
20 NSE:SIS 356.0 11.0% 2.14% 2.45%
21 NSE:HEXAWARE 239.0 11.3% 1.92% 2.21%
22 NSE:POLYMED 220.4 33.4% 1.57% 2.17%
23 NSE:TITAN 888.7 10.7% 1.87% 2.14%
24 NSE:INDUSINDBK 1297.9 -67.0% 5.89% 2.00%
25 NSE:MARICO 262.8 27.6% 1.46% 1.92%
26 NSE:HDFCAMC 2218.6 18.6% 1.51% 1.85%
27 NSE:MINDTREE 757.3 19.9% 1.37% 1.70%
28 NSE:CHOLAFIN 292.5 -46.3% 2.82% 1.56%
29 NSE:ITC 165.6 19.2% 1.26% 1.55%
30 NSE:SYMPHONY 787.7 13.9% 1.07% 1.26%
31 NSE:PIDILITIND 1231.9 22.8% 0.67% 0.85%
32 NSE:LALPATHLAB 1401.9 8.8% 0.70% 0.78%
33 NSE:GODREJAGRO 350.8 5.8% 0.60% 0.65%
Coffee Can Portfolio -3.0% 71.16% 77.56%

I know that the first comment someone will make looking at this portfolio is OVERDIVERSIFIED! Too many companies, too difficult to track. However, given the opportunities thrown by market post Covid - I wanted to dipboth my hands in and not just a few fingers. I want to play dumb with markets and having been taught some harsh lessons over the last few years I want to reduce individual company risk on my portfolio as much as possible.

For the non-financials - all of them tick boxes on 10%+ CAGR revenue growth (barring 2-3 companies which I picked up post market crash in March with much more valuation / div yield comfort) for last 8-10 years (if listing less than 8-10 years), ROCEs of more than 15% avg every year. Apart from these metrics - also have a small investment thesis written for most of these companies (should have done for all - maybe an exercise for later) which I plan to share later.

For the financials - tried to stick to 15%+ loan book growth over 10 years and ROEs of 15%+ over 10 years. This is also where I’ve got the majority of my pain (Bandhan, Indusind, Chola Fin) - however, most of these businesses have reasonably strong liability franchise, no ALM, reasonably good asset quality and should be amongst the survivors in post Covid world.

However, my learning seeing few of my high allocation stocks causing lots of grief has been I must try to stick to an equal weight portfolio. And even if I have high conviction - any leveraged financial to not be allocated more than 5% no matter how high the conviction.

Now you see the numbers at the bottom of 71% and 77% - this is my overall allocation to this Coffee Can Portfolio increased by 6% due to some past pre-Covid investments (part of satellite portfolio) going down much more. I believe Covid has resulted in some moderately good quality businesses being beaten black and blue where I see an opportunity to generate significant alpha through a satellite portfolio. I plan to reduce and run down that portfolio significantly over the next few years. Will share that in the next post.

I plan on being a lot more regular on this thread from now onwards - especially to record my own thought process of buying / selling different businesses and hope to get advice from all the wonderful people here to correct some of my biases. I would just like to iterate that the objective of investing for me is purely to achieve financial freedom and not necessarily become an expert investor with terrific accounting knowledge / business cycle acumen bla bla (although I hope I’m able to achieve that as well).

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27

Sharing my investment thesis for most of the CCP portfolio shared above. For ~0.5% positions, still building conviction on business/valuation so not much to share. Some of the numbers and dividend yields are applicable to my buy price and may not be true currently:

Bandhan Bank - Gruh’s infallible business model and execution fell into “what appears to be” fallible arms of Bandhan resulting in significant premium derating for Gruh investors. However, Bandhan is anextremely strong banking franchise in East, illustrated by strong liability franchise, 37% CASA healthy deposits incl. 78% retail deposits. <4 times leverage provides comfort. Diversifying loan book with Gruh asset backed loan book. Management track record of successful navigating past crisis of demonetization, GST, NBFC crisis provides confidence in emerging as strong survivor from the pandemic

Berger Paints - Paint sector has consistently outperformed overall market during the last 10-20 years in wealth creation (25-32% CAGR in market cap) led by superior growth opportunities. Berger has consistently grown revenues for the last 12 years at over 12-13% CAGR with consistently improving operating margins with laser sharp focus of management on operational excellence. Valuations have also expanded significantly over the last few years - however, given the growth track record and execution of management - even 15-20% derating can provide reasonable returns over the longer term

Bajaj Finance - A play on India’s consumer discretionary growth story through the fastest growing NBFC (35%+ loan book CAGR over last 10 years). Superbly well managed asset quality (0.5% NNPA) amidst many violent storms such as Demonetization, GST, NBFC crisis in past 4 years. No issues with ALM or raising debt from bond markets / CP / CD rates in toughest of situations. Excellent track record of product diversification and innovation to expand reach and capture all segment of market. Very conservative debt equity 3.3x for an NBFC in post Covid world should help weather the storm

Kotak Mahindra Bank - India’s dream of $5 trillion economy will most likely be built on a few very large financial institutions. Seasoned and pedigreed promoter Uday Kotak has seen and weathered multiple market cycles successfully. Super strong deposit franchise built over the last decade with hidden profits to help cover some part of NPAs arising out of post Covid business impact. Kotak Mahindra Bank appears to be built on a very prudent and conservative culture of lending led by the owner. Group companies profitability provide significant headroom for growth

HDFC Bank - India’s best private sector bank in the past 25 years supported by stupendous management leadership, growth and fantastic asset quality. Markets have always rewarded consistency of earnings throughout it’s history - only see major declines during massive economic shocks and downturns

Page Industries - Innerwear clothing business with 1st gen promoter, fantastic management and growth track record. Business with excellent pricing power and brand recognition and pull. Borne out by unbelievable return ratios ROCE>50%, ROE>45%. Still growing at 12-14% CAGR

ITC - Cash cow sin cigarette business throwing out obscene free cash flows at 13-14x multiple with 7-8% dividend yield. Huge capex over the years on building and growing FMCG business expected to reap rewards with increasing operating margins and lower future capex.

HDFC - India’s foremost corporate brand and group, NBFC and housing finance company. The original model of consistency in terms of loan book growth, managing asset quality translating into clockwork like revenue and PAT growth. Significant shareholder wealth creation through NBFC and subsidiaries. Excellent dividend payout as well with market giving low price to book

HDFC Life - Sunrise sector - house of HDFC, consistency in growth and earnings profile. Significantly up trending margins every quarter in value of new business. Valuations are debatable - profits of life insurers are anyways back-ended, but looking at it from 10 year perspective can provide decent returns.

HDFC AMC - HDFC brand customer trust and high brand salience! Cracked AMC business with high equity AUM, insanely profitable business, shareholder friendly management - somewhat cyclical and vulnerable to equity market sentiments. However, that cyclicality provides the opportunity for better returns by investing during tough periods

Titan - Indians and their significant love for Gold has helped turn this jewellery business into a brand of trust. From the house of Tatas with reputed shareholder friendly management, excellent growth and very good return ratios has made this into one of the biggest wealth creators in India’s super growth story.

Vmart - Play on the mass consumerization of one of 3 basic human needs - roti/kapda/makaan. Value fashion player into affordable clothing - excellent management track record of growth, zero debt business and strong balance sheet. Superior business model, financial position and operating metrics versus other retailers ABFRL, etc.

ICICI Bank - The bank has virtually seen a lost decade with huge corporate loan NPAs, tarnished image of CEO amidst poor corporate governance. The last few quarters provide significant insight into what the future may hold for this bank - excellent deposit franchise, strong pre provision profits, reducing NPAs. Covid might be the final speed-breaker on what could be the best performing bank of this decade

ICICI Lombard General Insurance - very well covered in VP thread. Key highlight post Covid - significant focus on health insurance across the world. Under penetration of insurance amongst Indians. May be getting premium valuations due to no private listed peer. From 10 year perspective, can expect decent returns.

ICICI Pru Life - Sunrise sector - house of ICICI. Pivot towards more non-Ulip products and growth showing traction in past couple of years. At half the valuation of HDFC Life, even decent growth 10-12% and business performance should provide reasonable returns

Inox Leisure - Business of cinemas - consumer discretionary one of the lowest ticket items for entertainment especially non metros with average ticket prices of Rs, 120-150. Business which markets/people assume is going to be dead post Covid due to OTT players. Big budget production houses / actor movies will never be able to recover costs from OTT launches. Plus the cinematic grandeur and appeal of watching a movie can never be replaced by OTT.

Alkyl Amines - Duopoly business model. Methyl amine capacity expansion from 30,000 tonne to 45,000 tonne in FY21.Consistency in growth - topline, margin expansion and very good ~25% ROCE and ROE over many years.

Marico - Stable growth 8-10% FMCG business along with 2.75% div yield and 40% ROCE at 26x multiple

Hexaware and Mindtree - Wanted some exposure to IT sector given the tremendous wealth creation from biggies like TCS and Infosys. However to achieve the 15%+ CAGR returns need to look at smaller mid cap companies with solid management execution track record, ROCEs, margins growing around 11-12% constant currency . Add in the perennial rupee depreciation and dividend yield and we can expect ~15% returns over the medium term

Polycab - Largest wire and cable manufacturer in India with market share of 12% in overall market and 18% in the organised market. Grown at over 13-14% CAGR last 6-7 years. Significant improvement in operating margins in last 3-4 years aided by backward integration (design, manufacturing etc.) of facilities to control product quality and costs. Management taken small scale capacity expansions to capture incremental market demand. Entered FMEG segment in 2014 and now growing at 40-50% on a small base.

Symphony - First gen promoter with asset light business model, strong 25%+ topline and bottomline 10 year growth with superb 30%+ ROE and ROCE. Long runway for growth, superb promoter capital allocation skills illustrated by “In 2008, the company acquired International Metal Products Company (Impco), which was started by Adam Goettl, who patented the first ever air cooler in 1930. After a series of ownership changes, the company had ended up in the hands of American private equity group Castle Harlan that was looking to sell. Symphony paid $650,000 (Rs 2.6 crore then) to acquire the company along with a debt of $25 million. The debt helped it get a tax write-off and the $650,000 Symphony paid was recovered within six months of operations.” https://www.forbesindia.com/article/super-50-companies-2017/symphony-beating-the-heat-with-its-air-coolers/47647/1

TCI Express - Asset light business model ROCEs more than 25% last 10 years, solid fundamentals supported by 8-10 years of growth and debt-free balance sheet. In FY21, the company is targeting a 20% reduction in its fixed costs (around Rs 20-25 crores) to protect margins. Management guided for 8-10% growth even in FY21. New sorting centres in Pune and Gurgaon expected to be operational from 2020-21. Also ramping up its presence in Indore and Nagpur to augment its distribution network in central India.

Poly Medicure - With the world gripped by Coronavirus expect government expenditure on healthcare infrastructure to significantly increase for the next 3-5 years. 25+ year old well established company and strong operating history - 200+ patents, 12-13% consistent topline and PAT growth, continuous capacity addition and product innovation and development has helped its growth journey over many years and expected for many more years.

Hester Biosciences - Track record of more than three decades in manufacturing of poultry vaccine. Certified and Accredited by major local/global organizations. Regularly launched new products as well as expanded its geographical presence in Nepal. Started distribution network in Tanzania and Kenya. Good track record of growth and profitability. Opportunity - United Nations and OIE (World Organization for Animal Health) have embarked on a worldwide PPR disease eradication program over a period of 15 years, starting in 2015. This PPR eradication project is expected to induce high demand for the PPR vaccine. Hester manufactures PPR and Goat pox vaccines of Nigerian strain. Government of India to support the livestock farmers and has allocated Rs.133.43 billion to be spent over next five years. Probably overpaid with valuations here - looking to trim

MAS Financial - NBFC catering to auto finance demand for relatively low income group customers. Management track record and stupendous business performance reminds me of Gruh Finance like execution. Unphased by demonetization, GST and NBFC crisis. Debt to equity very conservative of 2.7x with capital adequacy of almost 30%. Strong strong runway for growth available in post Covid world especially with suspected increased demand for autos

SIS - Market leader, huge market size 80,000cr growing at 8-10% per year, Strong essential services business, increasing focus on Safety/Hygiene due to Covid, entire portfolio of services, client across large MNC corporates to Govt like IRCTC, Excellent 15%+ growth, operating leverage, margin expansion 5 year Rev 18000cr PAT 800cr, strong promoter holding & marquee investors, debt & acquisitions slight worry

Prataap Snacks - Fast growing FMCG business gaining market share in highly competitive market. Scope for significant geographical expansion. Over the medium term, the company expects an operating margin gain of 200 bps due to direct distribution and contract manufacturing (lower logistics cost). The share of sales from contract manufacturing is expected to increase from the current 18 percent to 30 percent. This share was just 11 percent in Q2 FY19. Further, a favorable product mix with a higher share of sweet snacks should also help. It’s noteworthy that EBITDA margins for sweet snacks is almost 2x times that of other product categories.

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28

Trimmed 25% position in INOX Leisure today with minor profits. Averaging down made it a bigger allocation than I liked and today got the chance to trim it. One of the rare times averaging a falling knife all the way from 380 to 160 helped recover potential losses.

On the business front - interestingly came out with Q4 numbers and losses which I don’t think market’s going to like. Somewhat unexpected given there were at least 70-75 normal working days in Q4. I don’t see the business resuming normalcy before Q4FY21 in best case scenario. However, still very gung-ho about the business from a long term perspective and if markets offer 220-200 odd levels again, happy to add on again.

Anyway, just goes to show as I’ve highlighted on Bajaj Finance thread as well, all these market jargons- averaging up works, averaging down is a sin, don’t catch a falling knive - all of this is extremely stock and business specific. Never just blindly believe them and act!

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Inox has posted an EPS of -8 in Q4FY1920. It is worst affected by Corona. In this stock the question is now about survival for next one year, meanwhile, the stock price could do anything radical. In the bear market throes, it could even go as low as Rs.50 which is a multi-year support.

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I agree that it is amongst the worst affected businesses due to Corona. However completely disagree on all the other points.

  1. Inox is a debt free business and management has come out on record saying they can easily survive 4-6 quarters of nil income with current reserves even in the most bearish scenario. And by the time Inox gets wiped out, many many other entertainment related entities would be wiped out before it

  2. Low cost entertainment - Outside the major metros, the average ticket price across India is <Rs. 150 which is tremendous value for money - 3 hrs in an air conditioned hall / mall. Compare that to some other ways of entertainment - Music festivals (much higher ticket cost, generally poor infrastructure dirty open grounds), T20 cricket match (>500 lowest ticket, no freedom of movement), Stand up Comedy (similar cost of ticket but no big popular artist)

  3. Relatively inelastic demand - In my view the cinematic experience of a movie theater cannot be replicated in 99.9% of Indian homes unless you have 15*20ft walls and projectors at home supported by stereo surround sound which again most don’t. The grandeur and spectacle of high thrill action sequences/drama etc. on a massive screen in a cinema hall cannot be replaced. If you’ve heard the phrase “ye movie hall mein dekhni chahiye thi” - while Corona can change some things and habits, this one will die hard - a bit like cigarettes and alcohol.

  4. On your extremely bearish Rs 50 prediction - at the cost of putting my neck on the line, sorry this is no leveraged financial institution like Yes Bank or DHFL where just about any price is possible. If it does come to my surprise - it’ll come along with such prices for all the other travel / tourism / entertainment / cinemas / malls / public get-together related businesses. Also if you track the price of Inox - it has completely trailed the market leader PVR throughout the entire fall, market has been giving the exact same treatment as market leader. Q4 results may decouple both for sometime though - short term movements are difficult to predict.

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Also goes with my style of investing for now…

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Added 3M to my Coffee Can today:

Investment Thesis: Extremely diversified play on India’s economy covering several key sectors - Industrials, Automotives, Health Care, Consumer, Energy and Safety.Innovative product MNC with strong parentage 3M USA $90b company compared to India $2.5b. 51 global technology platforms. Only 10,000 out of 70,000 products launched in India. 10 year topline growth of 10%+ with PAT of 12%+. 10 year avg ROCE 25%+. Historically low valuations 50-55x.

Key risks - Major prolonged slowdown in economy. Rupee depreciation leading to high cost of imports (+ import duty regulations/taxation) reflected in higher cost of good sold. Relatively high valuations. Company never paid dividend - however potential positive as well with scope of dividend in future.

New MD in Aug19 concall talked about why no dividend - “despite the current headwinds in the economy, we remain optimistic about our growth and investment plans.”

Why company is growing at only 9-10% and not faster? “Our business model, our valuation creation model is differentiated technologies, differentiated product portfolios to customers and like I said about 70% plus percent of our portfolio is around safety, industrial. The industrial parts of our portfolio transportation and electronics and about 25% to 27% with healthcare and consumer. It is we do not have a lot of portions in our portfolio which we would call as mass general used products where you ramp up the sales with more just reach coverage etc. A lot of our portfolio that we take to market is differentiated products where a lot of demonstrations of products, communication of the value becomes paramount and so that inherently poses some, it allows us to grow at a certain rate, but it allows us to grow at that rate with quality growth, quality profitable growth. I think I would just call that out as the biggest, I do not call that as a barrier, but I just call that as the realities of the markets and the portfolios that we participated.”

Historically, company has tended to do extremely well in phases of infra led GDP growth. Revenues from 2002-04 were growing at similar 9-11% levels. However, next six years till 2010 top line grew at 25%+ CAGR. With so many line of businesses - demand for at least few LoBs (read Healthcare for next 4-6 quarters easily) should remain strong even in this Covid affected world till the economy recovers and growth comes back.

PS: Also topped up allocation on SIS - Facilities Management (now also offering Workplace Hygiene Management Services), the sort of requirement for every single offices/plant today.

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3M has booked loss of about 75 cr due to impairment of it’s subsidiary. I have not understood it. Have you understood this aspect .Is it one time or may impact in future too?
Thanks if you could elaborate for my understanding.secondly, the majority of sales are to industrials? Since SME may be most affected due to Covid, is it going to affect it’s sales for long periods?

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Thanks for the question.

The impairment is on account of revaluation of assets which I understand needs to happen on a yearly basis and companies need to reflect the fair value of such assets and not the book value / cost of acquisition. As per the accounting norms IND AS 36 - this impairment needs to be charged to the P/L as an expense. You can read more about it here:

3M India acquired 3M Electro and Communication for an investment for 590 crores. I’m not sure if the 79 cr is impaired out of 590 or another bigger/smaller figure.

Generally such impairments are one time charges. However in post Covid world - risk of such charges in future cannot be ruled out. For me it’s currently ignorable given the quantum of charge is 1 quarters PAT.

On your second question - I don’t have a break-up of institutional, corporate clients vs SME clients. For short term investors of less than 2 years this could be an important monitorable. But how to monitor it is anybody’s guess? There is definitely going to be significant amount of pain in SMEs in next few quarters / years, but I’m not playing the 1-2 year game. Reversion to mean is a very strong concept and that’s where I expect India’s economy and GDP to come back strong over a 5-7 year period where companies like 3M can outperform.

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Would like to highlight just one point which most fund managers never talk about in the public media…

The fund managers who actually follow the “buy proven quality businesses and hold them for a long time through cycles” in action do a humongous amount of work in tracking these businesses. That is what gives them the conviction to hold through those 3-4 year periods where an ICICI Bank or a Page Industries stock price goes nowhere.

Once their filtering criteria is decided and the universe of companies reduces to say 25, what exactly keeps them busy on a day to day basis? Their research teams spend hours talking to the channel, competitors, customers and other stakeholders on a monthly basis. I’ve known top B-school MBA’s get completely frustrated with the repetitive work of doing the same thing and updating their models on a quarterly basis while getting to do minimal new stock picking.

This is something retail investors who have full time careers to tend to can never get to do. In fact even someone like me who is managing other people’s money full time has a tough time doing primary work on my set of businesses on a regular enough basis.

While embracing the philosophy of such investors/fund managers isn’t difficult (especially when that philosophy is backed by short term performance), ask yourself if you are willing and able to put in the focused, qualitative work that it takes to hold onto the conviction over a period of 10 years where a couple of mini cycles can play out.

This is not a critique about the approach you have chosen but this is more of a “have you thought about this aspect” question. Putting this out here since the effort it takes to obsessively track those long term holdings over 10 years is huge and no one talks much about this aspect of investing. Sounds very simple but it is not easy and is like running a marathon

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Thanks for taking the time out and highlighting this @zygo23554 - I absolutely agree that doing regular research, analysis and consistently keeping track of so many portfolio companies is extremely difficult, time consuming and most likely impossible for retail investors like me.

However - that is the whole point of a Coffee Can Portfolio isn’t it? Trying to identify a list of companies which tick all the right boxes (quality of business, quality of management, accounting standards, shareholder friendliness and a superior track record of performance over multiple years/decades) such that it minimises the need to monitor and track each and every quarterly performance / annual report / presentation, etc.

If you look at most research, analysis and studies on retail investor performance - many studies and backtested results have shown that just staying passive in our investment approach can beat most benchmarks and fund managers. And this is a very very simple human virtue - the ability to stay inactive for very long periods. The more research, the more analysis, the more concalls, the more number crunching we do - the higher the probability that we will become more active to trade in and out of businesses.

Now whether I have it in me to be so inactive and let my portfolio just stay for years / decades is a question that will be answered only in due course of time. I certainly do believe that this is an approach which complements my personality.

As an example: I’ve been holding Avanti for more than 5 years now (avg 2-3% portfolio position) - and I’ve seen 3 massive drawdowns of more than 50-70% on the stock price within just 5 years. In 2017 Nov, I was sitting on paper profits of 6-7 lacs on Avanti. And if I had not averaged up significantly during the fall in 2018 - it would still currently be 4x returns from the original purchase price in 2015. There have been few significant learnings for me from my holding in Avanti Feeds - I believe I can withstand significant price corrections without taking any knee jerk reaction. Biggest learning has been on quality of business i.e. it is not a buy and forget type business. Not much pricing power, raw material and shrimp prices fluctuate wildly and similarly the stock performance as well. While the management is terrific with it’s execution, capacity expansion etc etc - such businesses are not Coffee Can type businesses.

Hence, my pursuit of trying to find higher quality businesses and management combination where I don’t have to pursue very active research and tracking of portfolio companies. Having said that, I fully well recognise that businesses don’t go up in a straight line. There can be many quarters or even couple of years where top line declines and margins contract. However, this is where I’m trying to identify quality of businesses which during any near term growth challenges won’t just fall off a cliff (Ex: more than 40-50% decline in PAT YoY etc. obviously not including Black Swan events like Covid).

My stock selection is the most critical aspect in being able to sustain an inactive portfolio management strategy and that in itself will be the core determining factor in my investment returns (target of 15% CAGR) apart from allocation.

Hope this helps to understand my thought process.

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37

Portfolio Update
Booked 40-50% gains in following across Coffee Can and Satellite Portfolios

  • Bajaj Fin, Aavas Financier and Sirca Paints
  • Reasoning: There is this wonderful phrase I heard 1st from Ridham Desai “Time in the market is more important than timing the market” which is ringing true over the last few weeks and also helping me stay invested at > 90% allocation and little dry power.
    So while I intend to stay invested in most positions, I have very little doubt that some of these sectors (leveraged financials - Baj Fin and Aavas Financier) are and going to remain deeply impacted for some time to come such as NBFCs. I do not see any surge in consumer demand for white goods or affordable housing in the next 4-6 months at least and currently there is little to no clarity on overall moratorium impact for these companies. So leverage combined with relatively high valuations >30x-40x multiples and 4-5x book value - I’m very happy to take Mr. Market’s offering of 40-50% profits in 2-3 months time. And would be a very willing buyer again at my original buy price or at current price after a gap of few months - also always the risk that reality turns out much better than expected and I never see these levels again. Specifically for Sirca Paints - such a small company trading at quite rich valuations in current environment 5.5x Sales 28-30x P/E. I believe Coronavirus is unprecedented and almost all companies demand is going to remain impacted for next few months. So while I can still imagine the valuations of behemoths and large caps possible sustaining due to multi-decadal history of performance - I’m not sure of smaller companies with barely few years of existence. Very happy to book 50% gain in less than a month - again happy to enter at original buy price.

Also since Bajaj Finance has been part of my core Coffee Can - it comes in this category which I highlighted above

Increased allocation in ITC and Godrej Agrovet in last couple of weeks.

Current PF break-up:
Coffee Can - 77%
Satellite - 22.5%
Nifty Jul/Aug 9000 Puts - 0.5% (as hedge and insurance)

PS: I also did some calculations. If I can re-invest the money from 50% gains in <3 months into an average 8% p.a Mutual Fund for next 9.75 years - still end up with 12% kind of CAGR over 10 years - pretty good but still a little short of 15% p.a of my target.

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Right strategy. Always periodically book profits - nothing like money in the bank.

One thing that one can do with stocks that go 50% up, is to sell all the portion that covers the cost. So if I had 100 Bajaj Finance at 1900 going to 2850, one could dispose 2/3rd of the portfolio and recover the capital to invest later. Booking profits periodically is a good habit and so is booking losses in worthless investments

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Consider trimming the number of positions Gurjot. Some companies like Pidilite, Berger are quoting at very high valuations are not justified by their growth. Of course, if you are in it for 10 years, then no need to tinker and worry about the new positions underperforming the ones you sold :-).

The long tail of very small %ge allocation stocks (<1%) may not necessarily magnify the portfolio returns but they end up taking too much of your monitoring/analysis time. Time is of essence here. Instead you may trim and consolidate into couple of secular growth stories. This is personal preference, though.

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Appreciate your inputs, though not for me, reading it I have a doubt if you can clarify. You said to invest in secular growth stories and at same time mention to sell pidilite as it’s quoting at expensive valuation. Pidilite is a secular growth story and most of such stories will be expensive and may have near term blips, which infact are ideal time to start position in them. Pls explain your thought if I understood it right? Thanks
Disc. Pidilite part of core portfolio. This is not a buy/sell recommendation

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haha, good question! However, I was talking about short term opportunity if at all Gurjot is interested in as you can see the second part of first paragraph clearly says to hold such companies if you are in it for 10 years.

In the second para I’m referring to the time lost in managing a large portfolio of 35 stocks with a long tail consisting of <1% allocation as Gurjot is a not a full time investor but is working professionally elsewhere. My intention is to consider them as mutually exclusive aspects i.e., opportunity cost and time management. I personally think, having 2 secular stories of 15% compounding is better than 15 stocks with 1% each with 2 to 4 stocks turning out to be multibaggers.

Since you have specifically raised this point, I would even sell the long tails and buy a pidilite and forget for 10 years with minimal monitoring. Lot of time saved here can be utilised elsewhere.

But again all this is personal preference and subjective if one wants to look for short term opportunities or not or if one is fine with spending time on long tails.

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In coffee can investing, the portfolio is left for a long duration without interference just like putting money in coffee can or piggy bank. The companies which grow and increase market cap will become larger in size with higher allocation of portfolio in due time. The companies which stagnate or lose market cap will become tail. So the bulk of return of the portfolio after a long time, say 10Years, will come from few companies only.
Now if you book profit from those winners in early stages you have disturbed the allocation process. The tail will have higher allocation than winner.
So profit booking is detrimental to a coffee can portfolio.

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Thanks for the portfolio feedback @richdreamz.

I completely agree that valuations for stocks like Berger / Pidilite are hard to justify with their relatively slow growth. Hence, I have actually taken some profits in Berger couple of weeks back because of the demand uncertainty and the current valuations. However, Pidilite is a small allocation as I was building position gradually, but it started to run away soon. Now I want to keep it for sometime and see the growth trajectory for 1-2 years before allocating more or cutting it out. Till then I’m even okay with 10% type safe returns on the small allocation.

Have also made some more changes recently almost identical to yours. Booked profits in HDFC Bank and added Divis Labs + Cera Sanitaryware. However, Both HDFC Bank and Baj Finance are on my radar on any corrections or as Q2 results come out in October.

With regards to above, I completely agree that this makes more sense. However, the tricky aspect is figuring out those 2 secular 15% compounders. Maybe with more time in the markets, I’ll be able to figure it out.

I read about people on VP talking about having minimum 5% allocation to any stock in the portfolio. And I tried to adopt that approach as well in the last 2-3 years. My sector/stock selection turned out to be bad and that concentrated approach meant - I ended up burning many months worth salary in last FY exacerbated by the Covid crash.

So now I’m very skeptical before allocating high sums to any company. I know this may be a lot more time consuming but definitely believe a highly diversified portfolio can also outperform the market - so far so good.

Will share my portfolio tracker as well soon.

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Not sure if you read through the thread or the page didn’t open properly for you? That is from 6 years ago when I was in my 1st year of investing.

You can go through the last few posts to see my latest portfolio and investment rationale.

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Since this got deleted from the Coffee Can thread, posting it here so that I can look back on this a few years later and objectively judge if I just got swayed by emotions on Saurabh’s / Marcellus’s philosophy or actually worked out well for me and all its followers.

"I find it quite incredible, the extent to which people are willing to go just to somehow someway portray any and everything which Marcellus’ team does in a negative manner.

They have laid bare, for free, their entire Consistent Compounders (aka Coffee Can) and Little Champs stock picking philosophy, portfolio, key accounting filters, etc in the most open and transparent manner that any non-client can ever expect or has ever seen with any other paid PMS.

It’s literally a free PMS service with them holding periodic webinars to explain the current portfolio construct, openly sharing views on each and every stock holding, investment thesis and rationale, sharing entry (Hdfc Life, etc.) and exits (Marico, ITC) at regular intervals. Please remember - these guys are not just looking at some excel models to pick stocks, they’ve actually done real world scuttlebutt and worked their backsides off to try and understand these businesses in as much detail as possible. There have been numerous examples of Saurabh explaining management meets / channel checks to explain the potential moat for these businesses (ex: Nestle milk powder - why it’s so dominant, advertising ban, etc. Divi’s labs extremely high barriers to entry because of long FDA approval cycles).

I agree that their team is also no not-for-profit NGO and they’ve deep vested interest in whatever they say. However, net-net I can only be utmost thankful and grateful for the absolutely free knowledge sharing by Marcellus team.

They are in no ways and means bound to do this level of free public service! I would absolutely love for their current style of PMS operations to continue lifelong!

As they say, the proof of the pudding is in the eating. So just by using their filters or you can say cloning some of their stock picks - I’m sitting on (partially booked) 2 lacs of profit (40% of investment) across Berger Paints, Alkyl Amines, ITC, Marico, Bajaj Finance (booked), Kotak Mahindra Bank, etc.

I hold many more stocks and you can see my portfolio on that thread. But the point is - just look at the time frame of the last 12-18 months since they’ve been talking and openly giving recommendations. It’s literally a free lunch if you can apply some mind of not investing at crazy valuations!!!

If only they had existed earlier - my investment journey could have been even better!"

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