Harsh's Coffee Can Portfolio: Views Invited

Q&A: Questions & Answers Portfolio Q&A
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Hello Fellow Members

This is my first post (i have been silent reader all these years ) and i post my portfolio here

This was supposed to “Fail safe ” Portfolio but now its “ Ticking Time Bomb ” given the nauseating valuation
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Rational

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This portfolio i have started constructing in mid 2018 and have sipped from then on as i am salaried guy

A little about my investing journey, Like typical upstart i was fascinated by Warren Buffett and read all his books everything i could lay my hands on.

My First Picks (as you might have already guessed) were typical Low P/E and high dividend yield PSU stocks. I thought myself of true Graham disciple when i first bought REC below “Book Value “ (i was so excited that i thought i had the best bargain deal of the century.)

However one good thing emerged from it, i came out unscathed from Mid and Small Cap Meltdown as i didn’t have any of them in my Portfolio

Buy-and -Hold comes naturally to me and holding “Coffee can Portfolio“ suits me in temperament wise

The current Portfolio is still Work in Progress and i would like to add more stocks when the valuation froth in “Quality” stocks cools down

Common Theme across Portfolio is

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My NAV on 1/1/2019 was 1000 and as of today i.e 27/10/2019 its 1243 implying 24.13%, In IRR terms it would have been even greater . The short term returns means nothing and it might be gone in one trading session . The Portfolio has been greatly aided by “Flight to Quality” and “Quality-at-any-Price” style currently in vogue. i had no foresight then and am lucky to be holding “Right” stocks in Bull market

Looking for your valuable feedback
Harsh

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Hi Harsh,
Congratulations on your first post. The portfolio seems well balanced and with all the best good names out there.
My 5 cents
Is it fair to have allocated ~23% of PF in one stock?
In my opinion, after the correction in Mid & Small caps you can look to also get into some quality names.
Since all these have had a very good run up since past few years, will they be able to continue to perform as highly in the next 3-5 years?

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Hi Rishu

Thanks for your reply

I agree with your view in totality.

I didn’t want Abbott or any stock to determine fate of my portfolio (and consequently mine too), but Extremely sharp run up (i am not complaining ha ha) in Abbott made it huge position.

In absolute value, my porfolio is too small to have the trimming/rebalancing and it would involve frictional and tax cost. But to correct it i have been adding to other positiion

Also i have positive mental bias for Abbott (need to overcome it) because i bought my first Abbott share while i was student, my first jobs first 2 salary is invested in abbott, it has made me more money then next 4 stocks (absolute return) and it is my first 3 bagger

As regards to expected fututre return from current portfolio and adding Mid cap and small cap i completely agree with you

Need to find new “Fresh legs” for next sprint

Thanks
Harsh

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Hello Harsh,
HDFC Bank, HDFC and HDFC AMC comprise more than a quarter of your portfolio. Since you are building a “Buy and Hold” portfolio, don’t you think this would be a risk however good the company might be? Are you considering trimming your position in any of these?

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Hi vm495

I agree with your observation. My fortune is majorily tied with 2 business houses Abbott and HDFC. The sharp run up in both Abbott and HDFC AMC has skewed the portfolio allocation

I havent thought of trimming yet because IMO, rebalancing carries Reinvestment risk since the new stocks have to be equally good if not better. And this stocks are my core portfolio bet and i want to hold them for really long term

Since i a salaried guy and SIP monthly , i can allocate fresh money to other stocks to steady the allocation .

Let me know what you think of it

Thanks
Harsh

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@Harsh1 Yes, it would be a good move to increase allocation in other stocks of your current portfolio to balance things out.

-I don’t see the point in holding HDFC if you have both HDFC bank and HDFCAMC. So may be you can exit it and consider other options. Any specific reason for not holding any from auto sector? Due to the slowdown, you can find some standard stocks at decent valuations in companies directly or indirectly related to this sector.

I am a beginner myself so maybe i am wrong. The seniors of this forum can definitely give better review for your portfolio

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Hi @vm495

Its turning out to be interesting discussion and first time i am having thought clarity because i am applying pen to paper. I should have been on forum much earlier

Rational for holding HDFC - HDFC is holding company for Bank, AMC, and Insurance co.
I don’t understand Insurance business (doesnt mean i understand banking and AMC business like back of my hand), but i want to play everything HDFC family stable has to offer (Display of FOMO bias at its best) . The valuations for all 3 are out of whack

Back of envelope calculation shows (i might be wrong) that HDFC as a holding company is good bet to play and and HDFC’s core business is added bonus. Infact once sanity to allocation returns i might further add it provided the holding company (whatever) discount remains or widens

As regards to Auto sector, Eicher looks interesting.

Also other company i am interested is VST industries , your Typical MNC-Free cash flow-Debt free-Stick to core Business-Dividend spitting -Compounding machine

Thanks
Harsh

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@Harsh1 I have not analyzed HDFC much so cannot specifically comment on the perks of holding it. My intention was that since you are bullish on HDFC, it would be better to directly hold the child companies as the parent companies have usually been and stayed undervalued. By the term “sanity of valuations” if you meant the parent company to trade at similar valuations to the child companies, I think there is less chance for that to happen. (You can check the stock price growth of other standard companies vs their holding companies for understanding)

Also by doing so, your portfolio would be more diversified than it is now thereby reducing risk.

Happy investing.

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You have started very well. The philosophy of going for quality had paid so far.

Continue investing in quality. Most people wander on the basis of valuations, PE multiple etc

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I have never been interested in these kind of portfolios with high P.E but after reading the articles of Saurabh Mukherjea (I am sure you must have read his articles and books),i am thinking its not a bad idea to overpay for quality especially if your time horizon is very long (15-20 years).
There is lot of recency bias to this thought process but i believe if your return expectation is lower(beating the index) and can withstand underperformance during certain time periods,i believe it should be ok.
Recent data shows as long the companies generate lot of cash and able to invest it for higher returns,high PE is justified.The thing is how high is acceptable?i think there will be a consolidation phase when the normalization would happen for some of these stocks and its matter of strong temperament during those times…

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Good portfolio with bias towards consistent performers. Such a portfolio works best during bear phase and is prompt to cash on any positive triggers from the economy, but is likely to go slow during bull phase. If you can keep your head even after seeing your portfolio under-performing during bull phase you are good to go with this strategy. Else, consider adding some other quality names from sectors which are expected to perform well during bull run, e.g. industrials, auto, infra etc.

I have read your rationale behind each stock but is interested to know how have you build conviction at your chosen one. Suppose, if the alternate, equally good player starts performing well compared to the one you’ve invested, will you be able to stay on your conviction?

e.g.

Why Relaxo & not Bata.
Why Whirlpool & not V-Guard / Havells / TTK Prestige
Why Syngene & not Divi’s.
Why HDFC Bank & not Kotak Bank.

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Hi @paraacbe

Glad to hear from you . Yup i became coffee can convert after reading Saurabh Mukherjee’s book

Coffee can as promoted by Saurabh isnt much different then Buffett’s Quote “Its better to buy wonderfull company at fair price then fair company at wonderfull price” and something like “with great business and great management, our holding period is forever”

In Indian context the fair price would be “expensive” and that extra premium is because Management Quality and Quality Corporate Governance is scarce commodity (Who would have ever thought that someday even Infosys would be embroiled in controversy amd as of writing its Apollo Hospital )

To the purist value Investors, Margin of Safety would be Expected Future Value less current price

In India (and everywhere to an extent), the Expected Future value is greatly dependent on Management Quality (and ofcourse other variables like Business Quality, longevity etc)

What is Expensive might or might not make you money but whats “value” might/mostly turn out Value Trap

For example , VST Industries vs ITC

Both companies are in same business of Ciggerette and ITC is dominant player but shareholders return is vastly different over last 5 years with VST ahead of ITC

Both companies are cash generarating Machine and requires very little capital Infusion, however this is were similiarity ends

VST returns excess cash in form of dividends and you have 2 option
1 - plough back in VST again and thereby increase your stake
2- Buy any other business of your coice according to your wisdom

Of course there is a price to be paid for you making the choice i.e 18% Dividend Distribtion Tax but the Management is playing fair with minority shareholders by returning cash to its rightful owner

On the other hand ITC is bent on destroying shareholder value by investing in business which has no relationship with original business or too capital intensive like hotels. Its criminal waste to destroy shareholders wealth when you cant earn satisfactory Return on Capital

I’d rather pay extra “premium”/High PE for VST then pay a single dime for ITC. The way i look at it is that Margin of safety is function of (Management) Quality rathen then Quantity (Price)

I agree with you on valuation front, and most important question for me like you is what PE is justified,
For sure i wouldnt be buying any stock in my current portfolio at this exorbitant valuation.
Bulk of my portfolio was bought is last October when the valuations were not that stretched

Dont know if you have read this long

Looking forward to hear from you

Thanks
Harsh

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Hi Sujay,

Thanks for dropping by. As regards to holding the portfolio throughout Cycle , it would be definately interesting to watch how i react . A down Cycle would would separate practitioner from preacher (which currently i am ). My very act of coming on this forum and bringing my activities under spotlight is to stay on course and stay true to my current style .

Another thing i have watched ( of course Strong recency bias is built into it ) is that this select few companies (and Stocks ) perform well across the cycle . while Parle had difficulty in selling Biscuits in current Slowdown , Nestle came up with good numbers . It would be very difficult scenario where entire portfolio is under performing , 1 or 2 stocks would always be firing on all cylinders and itch to fiddle around with portfolio wont be that strong. Its all theoretical and Sooner or later Market will prove me wrong and bring to situation where i will question my current style

Regarding building conviction on the stocks currently i have , to be honest this were easy find and served on Platter with no Extra efforts from my side. ( No stock Market conversation or story is complete without example of Asian Paints or HDFC Bank ). But strong MNC and Debt free Bias is on blatant display. Other things being equal and if choice boils down to 2 company i.e. Indian and MNC , i’ll go with MNC . occassionaly there would be blips like Ricoh and Mondelez foods

One interesting Tidbit (if you may be interested) , My broker services over 2000 Retail client Account and he told me that not 1 account has Whirlpool or Abbott or 3M or Honeywell or Nestle and only 4 had Bajaj Finance. Maybe buying “Quality” is “Contrarian”

Thanks
Harsh

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Good thought. I hope you will keep updating this thread if you change your investment style. Don’t ever be shy on doing that because style evolves with time on the market.

It would be best if you can keep faith on your overall picks based the performance of those out-performers in those times. I cautioned because, it’s a human bias to check overall portfolio performance with index or some mutual fund returns. Checking is fine on infrequent intervals but acting on that can prove harmful.

Your picks are good and have stood the test of multiple cycles, & should bear fruit only if you hold on to them. Of course you should also want to keep your eyes open because every company reaches a stage sometimes in its timeline when it starts losing edge.

In case you consider them equals, will you switch to Bata, which is a MNC, while Relaxo is not? :smiley:

I would like to know when your broker conveyed that to you. Quality is indeed contrarian in bull phase, but usually becomes a hoarding place during prolonged bear / sideways phase.

Disc. My own portfolio contains most of the names which you have, but has many other constituents too. However, I am growingly concerned by seeing more & more portfolio threads containing similar names in recent times, and that is more evident at the steep valuation which these scripts command now. The growth capability, addressable market size is intact for these players but the steep valuation can make these players undergo a time correction when other segments of the market picks up. It would be real hard to stay the course then.

All the very best.

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Hdfc is a Financial institution. Cash flows are the wrong gauge to look at for financial institutions since they’re lending money (cash outflow activity in itself)

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HI Sujay,

Hope you are doing well (and enjoying the Bull Market in your Portfolio):wink:

I would like to know when your broker conveyed that to you. Quality is indeed contrarian in bull phase, but usually becomes a hoarding place during prolonged bear / sideways phase.

So continuing from where we left, i again inquired with my broker with new names and results are still same, Not 1 Account holds Berger Paints , 1 holds Asian Paints and 16 hold HDFC Bank and 1 Accounts holds GSK Pharma and guess what, all the Accounts holding few above Stocks are dormant and belongs to Investor’s who are senior in age.

I asked him then what’s favorite with his client’s at the moment and pat came his reply: only and only YES Bank for last 3 months and before that it was DHFL

Maybe Share Holding Pattern will attest it. and it proves that most investor buy shares in their way down rather then way up.

While thinking over it , another thing occurred to me that somehow we dont have a dedicated thread for Asian Paint, Berger Paint or even for HDFC Banks at valuepickr after all this years. The Chola’s and Honeywell’s evince little interest from member’s but Yes bank has more the 1500 posts !!
Would love to hear from you .

Disc: Neither did i Solicit any other Information from my broker other then the Number of Accounts holding particular stocks , and nor did my broker give out any confidential information to me.

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Hi @cupawar

Thanks a ton for your appreciation. It motivated me to make first post on any stock related thread. Abbott it turns out to be.

My investment in Abbott if it has to be Summarized then it would be something like:

Abbott is closest i have come to own a Cash Minting Machine(sales and Profit Growth) which requires little Cash (Capex) to spit Cash (Dividends and Cash sitting on books) and which is Cash itself (75% of Book value is Cash)

Having said that it was risky to make 1 stock a big position and was lucky that it turned out well. (Major emphasis on Lucky)

As regards to HDFC bank, i will get back to you,Now that i am motivated to study it in deep . My major basis of investment (and i am still adding it every month/alternate month) came from 2 Books, Unusual billionaire by Saurabh Mukherjea and Bank for the Buck by Tamal Bandopadhyay and there was a thread on twitter by Gordon Max.

Apologies for delay in reply

Thanks
Harsh

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@Harsh1

Great to see a good portfolio consisting of solid companies especially for a coffee can type of portfolio. The only misift among the list seems to be syngene. I think something like divi’s could be a good like to like replacement though I have always found it to be too expensive barring the dip it had post the usfda fiasco some quarters back.

And great discussion post the starting of the thread from you and other boarders.

regards
hitesh.

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I find your posts to be very interesting, meaningful and logical and firmly believe that your contributions to the knowledge sharing is bound to be significant.
Have you studied pidilite, bandhan bank &credit access gramin?If yes, what’s your view?if not, would you find time to go through and post your opinion?

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Sorry to intervene and add my views. While I see that HDFC group is v transparent, follows law of land proactively and investor friendly, Kotak Mahindra bank has still not reduced it’s promotor holding.He first proposed to reduce holding through preference shares which was declined by the regulator.Now kotak Mahindra has approached the court for subvention of SEBI established rules and the outcome is awaited.
Request experienced boarders to add their views PL.

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