Hey! Have you ever looked at Glenmark? They have gained a large market share in the IPM market over the 5 years, with 3 products now earning over 100cr. Most of their IPM market share growth is in diabetes and respiratory segments. So Indian business is robust with growth above IPM. Now the mess is in their NCE division, where they have invested a large amount (~12% of sales each year), the first product is very close to approval in US. The approval is not received because of their pathetic compliance record (probably also the reason why market doesnāt give them value; EV/sales ~ 1.6). Have you looked at it? Its super cheap, has a great Indian business, and are looking to unlock value in their NDA division. If they simply demerge their Indian business, their market cap will probably go up by 50%.
Any views on ipca laboratories which is not in usa and hence chances of earnings collapsing is not high. They may not be able to increase their earnings like other usa export companies but rest of the world they can target without issues. So they can command higher multiples
hello hitesh sir, how to rid from mental accounting, suppose i invested one lakh in equity and it becomes 5 lakh in two years, some thing market crash happens now again my capital become one lakh,my answer is that i dont loose nothing but real answer i loose 4 lakh, how i manage mentally this type of condition , i know no one predict future ? how to see it by mentally this scenerio.
thanks ,
with reagards,
vimal
Hi Hitesh bhai
When you purchase a basket of stocks, and if a few of them run up in a short span of time, do you:
- Prune your holdings in the stocks that have run up so that your portfolio allocation is not skewed towards a few stocks
- Keep adding to these stocks due to their long term story still to play out
- Is there a max limit to a stock in a portfolio that you suggest (eg: no stock should cross 15% of portfolio)
In other words, when looking at portfolio allocation and rebalancing, should one look at current value of portfolio, or the cost value of the portfolio? Keeping tabs on current value helps in maintaining strict portfolio allocations - but then the upside in case of multibaggers get limited.
Thank you for your informative responses.
I am not too good at answering questions on behavioural finance. I tried reading Ralph dobelliās book but left it midway. It was too heavy for me. Give me Lynch anytime. 
Coming to the mental accounting part, the pain caused by loss even if it is notional or real is much more than the joy that profits bring from winners. So idea should be to learn to take losses in the stride and learn from them to avoid mistakes in the future. And take a portfolio approach while considering portfolio returns. This helps in reducing the pain and anguish caused by mistakes/losses in individual companies.
The other aspect is to have confidence in oneself. Even if say the past year or two have been poor due to markets or individual mistakes, the confidence that one will be able to spot winners and make money in future gives a lot of comfort. So even if returns are delayed, they dont remain denied. The March correction this year was a time when I was super confident that I would be able to spot a few winners once markets rebounded. And I latched on to the pharma bandwagon quite early. And all during the last few months at times it has been a frustrating wait to see other sectors (which i did not expect to run) run up, and pharma languishing in a range, But at the end of the day, chickens have come home to roost and pharma rally is showing its true colours. Thatās the result of having conviction and patience.
The ideal way to look at portfolio allocation is based on current value of stocks. Past is gone and in current scenario does not carry too much weight.
Run ups in individual stocks do create distortions in portfolio weightage. I think the ideal thing to do is to evaluate the company in question in terms of its future prospects as they stand now. And if it looks possible that significant upsides are possible even after run up in the stock price, then it may make sense to keep riding the position irrespective of portfolio weightage it attains after the run up.
Personally, if a stock price in my pf has run up a lot, I am not usually too worried. But as a mental barrier I consider a weightage of 50% of my portfolio in a single stock as a watershed level. i.e If the weightage of a single stock after sharp run up in my portfolio crosses 50%, I will consider gradual trimming of my position to bring it to levels below 50%.
But this is all a personal benchmark we can have according to our comfort levels. Since I hold at most 6-9 stocks in my portfolio, I have kept this level in my mind. Others who are more conservative can keep levels of around 30% or so in a 10 stock portfolio.
Idea is to cut the weeds and keep watering the flowers. Riding multibaggers with reasonably high allocation often is the key to create outsized portfolio returns. And this is a situation which we may not face too frequently in our investing life. So sometimes it makes sense to keep riding the winners irrespective of allocation, but keep an eye to detect excessive froth.
@Ajjugattu I dont track ipca too closely.
@harsh.beria93 I did not look at glenmark due to its debt heavy balance sheet.
Hello Hitesh Bhaiā¦ I donāt want any stock recommendations from youā¦ But I want to know how to plan a proper cash positionā¦any techniques you follow for it?
Say considering current market scenario what percentage of portfolio value you keep in cash or any other unit which you can suggestā¦
I find difficult holding cash and generally end up putting everything in ā¦ So if I sell something from holding, I immediately start searching for another opportunitiesā¦ This is generally a trader behaviour which I want to work onā¦
Anu thoughts on this would be helpful.
Thank You
Hello Hitesh Sir, I have a question on comparing different stocks in terms of attractiveness. I read in the above post that you keep only 6-9 stocks in your portfolio. How do manage to choose this?
I can roughly sense if something is maybe a 2x opportunity or a 4x opportunity or a continuous compounder trending at 10-15% CAGR growth etc. For example, I am convinced Jagran and DB Corp are both at least a 2x opportunity if I hold and wait till the cycle turns (which is what I am doing). But if I am forced to pick only one of the two, it would be difficultā¦
Problem becomes more complicated when comparing multiple different types of stocks and rank them in terms of return expectations and risk perceived. Among various different companies I am currently holding, it is very difficult to precisely rank them and hold even the top 10 for me. I can sense some good upside potential for longer term and many different types of possible risks also but becomes tough to choose just 10.
Hence, I am currently holding about 30 stocksā¦ I can roughly categorize them into cyclical undervaluation(Nalco, Vedanta, ACE, Ashok leyland etc.), some special situation related undervaluation(Eg: Zee), high growth possibility stock (IDFC, CDSL), consistent compounder (Eg: HDFC) and safe dividend yielding moderate growth kind of stock (ITC, PowerGrid, Bajaj). I am owning a combination of these different types of stocks to diversify risk and get some reasonable returns (better than index hopefully over longer term)
Please share your thoughts on this approach vs. a concentrated approach. Thank you.
PS: While I can understand businesses and valuation reasonably well, I am not very experienced in investing. Hence it is giving me comfort to hold more companies.
There is a lot of discussion on pharma stocks lately. After investing in a few of these stocks for a few years, my personal realization is that unless you are in the industry, it is actually a very tough industry to understand and build conviction. I have invested in a Lupin, when it was clear to many people that its metformin story was on the way down and I sold out an upcoming Divis after my patience ran out for the story to play out - and something or the other bad news kept coming out. I almost put pharma into a movie business, where you donāt know how the next molecule will play out unless you really go for market leaders. I am actually surprised at how you are able to build the conviction to go all out - maybe being in the same profession is helpful. I personally moved to investing into pharma funds - the only sector I want exposure in but canāt build conviction on only 1 or 2 stocks. Any insight on such a strategy OR levers to build real conviction on specific stocks.
Hitesh bhai,
How does one develop conviction on sector tailwinds. For instance you were quick to spot that export facing pharma companies and related themes should do well. How does one make the determination if the tailwinds are due to short term advantages - like supply chain disruption in China and demand due to covid or if tue demand is more structural in nature?
Sir are you still tracking Banco Products? Or any other auto ancillary stock like Endurance or Varroc? Considering that Banco has good dividend yield whatās your view on this and can it be accumulated for medium to long term?
Getting into cash is largely related to market condition for me. If I see excessive froth and risk reward seems unfavourable I tend to gradually start getting into cash. Personally I dont have much use for keeping insignificant amounts of money in cash. Some investors like Donald and many others who I have interacted with are okay with keeping around 10-15% cash at all times to take advantage of any market anomaly or opportunity in their favorite company.
I dont feel comfortable with cash levels of say 10% or so. For me it has to be significantly higher of say 30-40% or sometimes even higher. In the post Corona meltdown, i sold off most of my portfolio and was sitting on 80-90% cash. In hindsight it might have been a panic decision and may be termed wrong but what it did for me was it freed my mind from market panic and it helped me in focussing on where the opportunity was for finding winners. If I had remained invested in say a few companies, my focus would have been on those companies, their peers, and what all was happening in that universe. Besides the market swings and newsflow would always have been there to distract me.
I was infact expecting much worse correction than what had already happened and now that I think about it it was a wrong notion. I was not trusting the upmoves in the initial phases and was not ready to buy anything no matter how cheap it appeared. But once I saw that the markets started moving up without reacting too much to all the negative news and once I figured out that pharma, speciality chem etc was showing resilience, I had my sights fixed in these sectors.
First big sign for me about getting into the markets was Alembic hitting all time highs after crossing 790 kind of levels. And that happened after great results and strong management commentary. So it was not a flash in the pan move. That convinced me about getting into the markets.
Going ahead, I still feel jittery about markets but since the companies I am invested in have good earnings visibility irrespective of the Covid after effects, I am giving them more rope. But I am always on the lookout for any signs of loss of momentum in the markets or in the companies I am invested in. As of now things seem okay. So I am nearly fully invested and sometimes keep rotating my trading bets while being invested in core stocks.
If you have read most of my posts, I am most of the times what people would term as a momentum chaser. And I am unashamed about it. That is what has worked for me all these years and that is what I am comfortable with. Its more so after reading books like Next Apple, William o neillās How to make money in stocks, Mark Minervini etc.
The question to ask is what is it that makes stocks breakout out of 52 week highs or all time highs. The most obvious answer is that these companies have a lot going for them and markets are convinced about their investment merits. I dont blindly go out and buy each and every sector or company that fits above category. I try to figure out where I would be comfortable investing from the universe of stocks showing strong momentum. If I feel that fundamentals are aligning with the moves in stock prices, I am comfortable investing in them.
Just to come back to an example provided by you, a company like Jagran or DB corp. With the style I have been investing, I can never bring myself to invest in these kind of names. Even thinking about these companies fundamentally, a couple of years back I could not imagine myself beginning my day without reading the daily newspapers. But now I have a couple of apps on my mobile which provide me with all the news that I need to start my day. So even though I have the newspapers delivered to my home, it would make no difference to me if they were not delivered. I am allowing them to be delivered because money wise their cost is negligble or even less and other family members might be interested. And that is exactly reflected in the stock prices of these names. They keep close to their recent bottoms without any meaningful rallies. Some day these may go up but I dont have the patience or conviction to hold these for long periods of time.
Whereas in case of companies like Dr Reddys, Laurus, Alembic, I have posted my investment arguments in few paragraphs and these are the kind of companies I am okay betting big on. And once I have good conviction in a company or a group of companies, my style is to bet hard and ride the positions. The results at portfolio levels are dramatic when these kind of bets work. If they dont work, even after enough time is there, and if things that I have thought or written down in my investment argument dont work out, I start to get out of the positions.
Problem with concentrated positions is that you cannot afford to be wrong too many number of times. e.g in case of laurus, I had written that if I consider q4 fy 20 as a base quarter, then company can do net profits of close to 400-450 crores in FY 21 and that number against the 255 crores net profit number for FY 20 was going to look very exciting to the markets and there was bound to be good risk reward. This was my logic when stock price was around 440-460. In contrast I found a lot of guys worrying why Warburg was selling, why promoters holding was low and why they did not buy from markets and so on and so forth. In short a million reasons not to buy. For me the fact that company reported a profit of 110 crores for q4 fy 20 and that too on the back of higher contribution from formulation division was a definite sign to invest. And when management clearly articulated that they are going to focus on increasing revenues from formulation diviion, it was a case where there was high likelihood of sales growth and margin improvement (due to higher FD sales).
I think in building conviction in any company, the most important parameters to focus are on hard facts like earnings and balance sheet, management articulation and how they have walked the talk, etc. Going through the previous annual reports, concalls management interviews etc helps. Idea should not be swayed in your thesis by what others are saying about the company or why others are selling or such other issues.
When all things like the strength in the stock price, business momentum, management smarts etc fall in place at the same time, taking concentrated bets becomes easy.
I have never been a diversified investor so have no idea how they live with so many stocks in their portfolio. Once the number of stocks in my portfolio start crossing 10 and some rare times beyond 15, I start getting uncomfortable and try getting out of tail end positions.
We are in a lucky time frame when we have easy access to annual reports, even research reports, concalls, management interviews etc. So if we figure out that a particular sector is likely to do well, then the best thing to do is go through the relevant stuff listed above in companies from that particular sector. If most management are talking in the same vein, and if reported numbers are pointing in same direction, it should help in building conviction.
About how sustainable the tailwinds are, most of the times, the answer is there in concalls where a lot of the analysts and some individual investors end up asking same kind of questions regarding sustainability and management responses are consistent.
If it were only a couple of companiesā management answering in the affirmative about the sustainability of tailwinds, I would be slightly suspicious, but if most managements in the sector start talking in the same tone, one has to sit up and take notice and act accordingly.
Insightfulā¦
Conclusion is in bull market (momentum) be 90-100% investedā¦keep rotating as per convenienceā¦
And if see signs of momentum giving up itselfā¦ Start increasing cash levels unless momentum found againā¦
Can keep invested in firms delivering good numbers the timeā¦ irrespective of bull-bear phaseā¦
Namaste Bhai!!
Natco was the first one to get into settlement with Revlimid. Settlement with Dr Reddy came later which sort of added to the competition to Natco, which is sort of negative news for the Natco. Then why did street took it as positive news and locked it in Upper Circuit when we are still awaiting for the FDA approval for any of the companies?
Hitesh Ji: I think this seems to be happening in IT sector now. Almost all management are bullish about future. Are you invested in any IT stocks. What is your view on IT?
Hello Hiteshbhai
What are your views on Bharat Rasayan & Valiant Organics?
Hello Hitesh Bhai. Getting out of stock is very difficult for many people. Can you please explain through 1 or 2 charts where and how to exit in momentum stocks.what are signals that a chat gives when it is about to turn down.It will be very useful for all of us.
Banco is one of those companies which need strong sectoral tailwinds to provide decent returns. The one good thing about management I felt was that they did not screw the balance sheet and have been giving good dividends to shareholders. That atleast limits downside for investors during a downcycle.
Fundamentally I dont track the company closely but technically the stock broke out of a cup and handle pattern above 90 with targets in the range of 120 plus. After the breakout it currently seems to be consolidating and attempting to test breakout zone of around 90. 200 day exponential moving avg is closeby around 88. So if one has to take a technical bet, the equation would be something like buy around 88-90, stop loss of around 10% and target of 120 plus.
Looking at the momentum in other auto ancillary companies, this pattern could play out but fundamentally I donāt have the comfort to invest in these kind of names currently.
@hary197 I dont track either bharat rasasyan or valiant organics.