so how often you churn your PF? how should one construct PF? should it be a concentrated one or diversified?
any hidden gems you may want to suggest for novice investors in this raging bull market? thanks
Godly quote. GIven the propensity to explore all books esp by me⌠Shall attempt to be focusâŚ
so how often you churn your PF?
Unless I am forced to churn, following situations I am forced:
- When the loss goes beyond my risk appetite. A loss something which I have doubt that I will able to recover.
- When I feel I should sell into strength i.e. not market strength. Any winning return beyond my historical average is my strength.
how should one construct PF?
- I add stocks to profit line meaning I average upwards. I do not average losses.
- I increase my portfolio when my risk commitment remain same or goes down. Till then I sit out.
- Manager your losers, loss is a function of gain. Profit will come automatically. I prefer to be a stupid while having profit than a genius having losses.
should it be a concentrated one or diversified?
- I prefer concentrated portfolio as I keep adding meaningful position to single stock. In this way capital and risk commitment becomes manageable.
- Becomes easier to keep a track of few stocks.
any hidden gems you may want to suggest for novice investors in this raging bull market?
- I am not aware of any hidden gems, apologies. I made and lost money from both good and bad stocks. What I have realised when a stock gives profit after initial buying double/triple analyse to make sure fundamentals are robust.
- 75% efforts should be spent on investment execution (buying, adding and selling) and maintenance (metrics plus psychology).
Most of gems I found in own my metrics whenever I review. This has never changed since 20 years.
Thanks
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hello Sir, My question is on the above point made, if a good fundamental stock falls in line with the market mood, does it not make sense to buy on decline which eventually would average your cost price, I do agree that we need to average upwards as well but why to miss the downward fall, thatâs precisely my point, your thoughts please
I think this is we have discussed earlier. There are two money management methods 1. Martingale 2. Anti Martingale.
I use anti martingale because I do not want to increase my risk and capital commitment.
If I buy 100 shares of Stock A at 100. My capital commitment is 10000 INR, My risk exposure say 2000 i.e 20%
Stock fell to 80, again I purchase 100 shares. My capital commitment is 8000 and risk 1600.
So after transaction 2 my capital commitment becomes 18000, risk exposure becomes 3600. Imagine if total capital available is 50000 my risk of ruin jumped from 20% to 32%.
Second if a stock moves to 130 from 60 it will come via 100 only. I am happy to catch at 110 by making transaction two risk free. Anyway I wonât allow a loss beyond 15-20% for transaction. I would prefer to give more breathing space after it performs i.e. in profit.
Note: a stock appears in my watch list for long time even decade. I uppdate all quarterly results and news. But when it comes to capital commitment money goes to winner. Even it requires multiple entries I am fine. Transaction costs are too small to trade off with a big capital loss. Tax is not part of my buying and selling decision.
I am not sure about market mood and good fundamental as what is good mood to you is bad mood to me. Stocks do not come back many times, they come back sometimes after decades. Everything has a cost to performance and sometimes severe. I will not attempt to include so much uncertainties to my metrics.
Money management works differently for different people. I shared what I do, but one should keep in mind at any point:
- Never allow risk of ruin at higher level, I do not go beyond Zero% in fact.
- If you lose 10% you have to recover 11%, for losing 50% recover 100%, for losing 90% it would be 900%. Some losses beyond a point are extremely difficult to recover.
- The impact of holding period on your performance.
- The accuracy i.e. successful stocks overall in portfolio.
In short if are holding 5 stocks and all in losses and averaging out again and again, you may need much more risk and capital commitment. If you have a plan you are welcome. I will not allow risk of ruin beyond zero% and that never allows me to average losses.
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Thanks Sir for the notes, sorry this was repeat as I have read a similar one from you some time back.
One more question : In your experience once you have decided on the stock is it preferred to invest a good % of the designated allocation in one go or buy at regular intervals, with a full time job sometimes it becomes difficult to monitor the stock on a daily basis and buy it at the right price at the right time , your thoughts please.
And thanks for taking your time out and answering all our questions 
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No need to be sorry, I was just reminding how subjective money management is. Unless we maintain metrics we will not know what is good and bad for us.
I would always say add in multiple intervals, not necessary to track daily prices. Even for my trading portfolio I track prices alternate day unless I get trigger for stop loss. For investing portfolio I update prices every Saturday.
Let me give you an example of new stock which is performing for some time.
Name: Everest Industries
Disclaimer: My wife is invested, I have helped her possibly in decision making. Not accountability and responsibility. 
Here is the sequence of events:
Screening and final short list for investment documentation: March 14 2017
First round investment document completion: 19 April 2017
Investment decision freezing: 25 April 2017
Capital Allocation: Maximum risk exposure 1% of capital. Total capital commitment capped at 5% of capital. This means if I have 100000 Rs capital then maximum risk exposure at any point of time 1000 Rs. Maximum amount I can invest is 5000 Rs.
Now watch for actual execution: (all are real numbers except I have change amount to a base to protect privacy).
I have attached the working file, just customised for you.
- I bought Everest on 05 Jun at 292 around with 30000 initial risk i.e. 15%.
- On 20 Jun 17 I added further, why? At 395 price on 20 Jun my locked in profit was around 70575 that is negative risk. That allowed me to add transaction 2. Although capital commitment increased to 4 lacs that date (2 transactions) my risk was minus 40575.
- Also note though I was ready for investment on 25 April I waited for almost 2 months till 20 Jun. I try to follow constructive price behaviour, you may ignore these things.
Look at today where do I stand today:
Total number of transactions: 4
Total Capital Commitment : 8 lacs
Risk exposure: Minus 117904 (this is my trump card for survival)
Of course return I donât track here, I prepare separate metrics. I breakdown CAGR to expectancy and holding period, Expectancy is broken down to accuracy and margin.
If it sounds confusing we can talk, please feel free to connect. But as I said money management can be multiple methods. But follow a suitable method, without a proper money management CAGR measurement can be misleading.
New Microsoft Excel Worksheet.xlsx (10.1 KB)
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Just want to add couple of more things to manage behavioral finance:
-
The day I bought first Everest, say I took 30000 is maximum possible loss. I immediately debited to my income and expenditure, means I reduced my income for the year by 30000. As price moves up I adjust this number. Maximum adversity factored.
-
The moment I locked in profit I credit to my income meaning add to income. If there is a slippage beyond the point for some reason my income will fall from factored. It goes to slippage amount then and lessons learnt.
Investment can be fascinating, I enjoyed thoroughly across two decades. Do you guys agree?
Tonnes of wishes
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Thank you for wonderful explanation .
Since I do not prefer trading strategies, I was not aware of Anti Martingale strategy you have elaborated. Thanks for that. Something new to learn.
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If I pick a stock which has good long term prospects, but probably appears pricey, but after my initial purchase it starts to move sideways say for 3-6 months like the Gruh Finance does currently, what should be the approach to follow?
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Let us say after the initial purchase, the stock corrects by 20-30%, the long term prospects remain the same, the price has become much more attractive than my initial purchase? Here I assume I am not bothered about assumed loss (yet to be realised) and see that growth prospects have not changed, but it is simply a price fluctuation. Shouldnât I take advantage of such a situation by investing more rather than avoiding further purchases or booking loss and closing the position? An example would be Can Fin Homes.
Most people would say the both these stocks are pricey, but for our analysis purpose, let us assume they are fairly valued.
If you can explain these cases, that would be helpful. 
Thanks for writing to me, let me put my views which are extremely customised:
- Money management is like finger print. What works for me does not work for you. Your own metrics tells the story what works for you. For example in my metrics maintenance since 2003 the highest loss I could recover was 27.54%. The recovery beyond 25% was less than 1% of transaction. The maximum bunch of successful recovery was around 15-18%. Now this might do with entry timing or a good stock but fact remains. In 14 years I couldnât recover 15-18% loss properly. I am not prepared to build more loss than that into my forecasting.
- There are multiple ways of money management which includes averaging downwards also. It requires a strong circle of competence, super concentrated portfolio and high capital requirement. But not at the cost of your own performance I.e. metrics.
- Though traders follow money management strongly, but itâs a mathematical term applicable for all financial decisions which deals with forecasting, probability and permutations and combinations. It doesnât spare long term or short term investing in short to my view. Mathematics is a fact, lose 50% you have to recover 100%.
- Growth prospects, competitive advantage is embedded to company value chain. Price is decided through economics of demand and supply. Isnât it? I look for convergence point where my intelligence and hard work is respected by markets. That will be a place where my metrics is improving (first outperform my own requirement, second acceleration). As I mentioned I keep a stock into research and watch list for decade even. But I wonât keep anything in portfolio which affects my metrics beyond tolerable point.
- Behavioural finance ensures we remain over confident, arrogant, recency biased etc when we prepare a document be it growth story or business valuation. In the process we start believing too much into what we prepare than what it may be.
Although I prepare different metrics let me highlight most significant ones:
Expectancy of a system:
How much money I am making on capital invested? This is a function of accuracy and winning/losing margin.
Average holding period of a stock: how long I can hold a stock considering drawdown and performance both.
The point I am making spend time on money management and risk management to understand what works best for you. Analyse metrics to know what is happening. Some time I will write the lessons I got from metrics review.
By the way me and my group review combined metrics sometime. Last time we did in 2014, this time we are planning in Jan 26, 2018. 33 people, more than 750 years combined, 1 million transaction plus. Last time it blew us off with findings, this time it will dislodge again for sure. In short it made us last time look so stupid!
But I would still say I am happy to be stupid while in profits than genius making losses always.
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Let me give you my experience of averaging down. My Guru made bags of money by averaging down even. But something which I noted, wasnât sure I could have implemented or even attempt now.
- 25-30% allocation to a single stock spanning over multiple years. This means draw down of even 50-60% sometime.
- Conviction resulting from water tight documentation, I wonât be able to do it. This includes even meeting management, 8/9 types of business valuation, hundreds of pages study on competitive advantage and industry. I do not have that brains to replicate.
- His ability to sell at one go, he has sold Airtel after holding multi decade. I told him when Airtel started call cost was 40 rs and samosa was 2 rs, now samosa cost 40 rs and call 2 rs. Of course he had done his exit strategy, but one stroke few lac shares sold. I am yet to learn selling a share in hue profit at one go.
- He was sitting on cash for years (once 3 and half years). The reason was documentation and idea is not freezed. And then write the off idea saying stock is too expensive. I do not have patience to do that.
Hence I preferred to create a bank roll through minimum risk and tight money management. This method pushed me for more maintenance and metrics but was helping me in staying away from large draw drowns and more importantly I wanted to build a system with lower accuracy. I am still refining where I can survive next decade by only winning 25% of my stocks so that all the mistakes can be covered without making me bankrupt again.
In the end itâs a grim reminder to myself, I am an average guy; have to stick around with available competence.
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Thank you sir for the elaborate notes.
It took time for me to understand what was written and interpret the same in the spreadsheet
Question on the calculation on the spreadsheet.
- What is the significance of Column K and how is the MCP determined, I couldnât see any calculation done against the column and your locked in gain % in column T is based on column K
My interpretation on your message is as follows:
If a share is being purchased and the next purchase should be done once the Risk associated on the first purchase becomes negative risk i.e it turns positive and way above the 15% risk level, I am sure I may not have interpreted it 100% but at-least want to check if I am in the right track
Many thanks for your inputs, it was very helpful and opens up door for me on how to keep a track of our purchase.
You are welcome.
Take this way if I bought 100 shares at 100 Rs. If I take 20% risk that means I can take 2000 risk on 10000 capital invested here. That means I have to exit at 80 rs no matter what comes. So my OCP (original capital protection) was 80 and MCP (modified capital protection) at 80.
Now say stock price moves to 150, I have decided to move MCP to 120 from 80 previous. OCP is the initial risk which was factored. I sell always basis MCP. Now if my selling point is 100 and cost was 100 that means under no circumstances I will incur a loss. Rather I will exit at a profit of 20 per share. Locked in profit amount will be (120-100) 20 rs per share. The locked in profit is nothing but negative risk.
Purchase price -100, OCP-80, MCP-80
Current price-150, OCP-80, MCP-120
Inherent risk= (Current price MINUS OCP)
Residual risk= (Current price MINUS MCP)
Residual risk is the current risk you have, once MCP moves beyond cost risk becomes negative as profits get locked in.
Now put your formula accordingly.
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Thanks Sir, makes lot of sense now,
When you had given the example of Everest Industries as an investment what are the factors you had considered it for a worthwhile investment, this will help to know what has to be considered before making a decision.
Normally I look after P/E and if it less than industry standard and lower than it peers it is considered as a value buy and any company which is a turnaround story which starts posting profit after many quarters of -ve result. These are the two things I currently consider for making my investment although I have now understood there are far many better and efficient ways to look for value buys which I believe will learn in the years to come.
Now you have opened the whole box. The process behind investment decision is seven step for me :
- Understanding business: I use a template to document business which includes customers, suppliers, regulations etc.
- I attempt to understand where the competitive advantage of a company. Competitive advantage of a company is embedded to value chain which is linked to business process. Most of time I fall short of expectations here.
- I tried to read how is management of company is with respect to shareholders and performance.
- This step I attempt to do financial analysis (ratio is a big part) to confirm my understanding (1-3 above).
- Next step for me would be valuation. I use franchise valuation for a company with tailored process. For growth investing I use expectation investing.
- I tried to see special situations if any like undervalued asset, business restructuring if any.
- Last step for me is waiting for right opportune moment. That would mean constructive price behaviour for me. This means I wait for volatility and price contraction before I enter.
A lot of these are covered under my thread under Guru Mantra. Balance will update sometime, I am trying to complete as I get free from holidays.
What I do not believe or do:
- I do not know what is good fundamental, value buy, strong moat, tepid environment etc. These words are too complex for me, never able to understand and apply them.
- I keep hearing bottom fishing terms like that. I do not know where bottom is or top is. I want to fish in swimming pool if available with a bucket. In short I believe market can be timed for key important decision making. Of course I agree I can not time market.
- Ratios based market price are too dynamic and change every second. For screening and market directions for once I am ok but not for buying. This include PE ratio etc.
But again you have to make note, I am not end of benchmark of spectrum. It may not work for everyone, some time it does not work for me . I could see bad performance in metrics and then I attempt to adjust it if I can.
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thank you and fantastic. Have a question. Often people talk about exit multiples. What does that mean? For current holdings - do we project a forward eps and a PE multiple to exit? Appreciate your response
Exit Multiples
This means devise plan to exit your investment (for the time being) as PE ratio is high.
Now let us examine the loop:
Price Earning Ratio
Price Earning ratio is a multiple of earnings crowd wants to pay at certain time. Rightly so because when you a buy a piece of business you share of piece of earnings (either in form of current profit or in terms accumulated retained earnings which are available after ducking off debt). Now question why one wants to pay a higher multiple because crowd is expecting the company growth will be much higher (either due to itâs own performance or a support from countryâs policies).
What is crowd?
Crowd is the buyers and sellers gather at stock exchange to buy and sell shares. For every price paid there is a seller. Thatâs the eternal truth of market.
There can be a category of buyer called initiative buyers or the big financial institutions who have no choice but to initiate a buy without waiting for others. They are the oneâs having huge fund at disposal who have to buy lacs of shares. Where from they are getting money? Your and my money I.e. mutual fund, pension fund etc. These are the guys who drives liquidity and volume.
Kindly note brokerage houses or PMS are not institutions. Yes a lot of them manage PMS and brokerage but different divisions. Buying and selling could have been influenced but lots of checks and balances exist to assume everything is hand in glove. By the way asking broker about a share is like asking a waiter what is best dish they have. You should go to chef!
Another category of buyers called reactionary buyers like you and me. We do our homework of course. But we do not influence volume or liquidity. So our buying and selling will not drive market to a specific direction of market multiples.
Now both category of buyers can be wrong and right but it does not change their nature.
Forward EPS
I quoted somewhere else, financial institutions do not use DCF, franchise valuation etc. The process starts with estimating future earnings. This is a forecasting process which include discussing with management, analysing financials, meeting outside stakeholders, triangulate from multiple sources like industry insight, order book. Ultimately they arrive at a projected EPS and growth. This form the basis of their buying.
Now can we replicate a process followed by financial institution? After working years for them I do not follow when it comes to my individual investment. Even if you are able to extrapolate information or discuss you would find difficult to replicate their review process. Itâs a company made of hundreds of SME and departments. I canât think of doing it.
Why PE ratio falls then
Everyone is prone to wrong process. The estimations prepared by institutions goes wrong. That forces them to rebalance the portfolio, expectations come down so does PE. Some people call it is expectation investing I.e. more specialised subset of growth investing.
I mentioned above, this is how I use PE ratio:
- Higher PE indicates higher expectation. This is a double edge sword, if a high PE company outperforms its expectations PE re-rating is much quicker on higher side. Similarly if it falls short of estimation then severely gets punished.
- I compare a similar company on growth trajectory to find out what was PE expansion happened with other company. Suppose company A which is ex outperformer and company B is current outperformer, I check what was the PE expanded from beginning of growth to maturity growth. This gives me a rough indication which stage of maturity cycle I am in.
- I am sceptical for a company where PE is expanding but growth is not accelerating. I am ok with a company which has a 80 PE and 10% EPS growth. But moving to 100 PE with 10% growth is dicey to me. I expect 100 PE with 15% growth. There has to be acceleration in some form I.e. 10% , 15%, 20% etc.
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Sir,
Allow me to quote certain examples on PE as a mode. I too felt after repeated search that PE in isolation is a bad mode of stock selectionâŚ
Samples
- Consider Gillette: PE is in triple digits and EPS growth rate is in single digit for a long time. It has stays there due to MNC premium/high promoters holding and a potential healthy swap with P&GâŚ
- Consider Dmart: PE again high but boosted by EPS accelerated for sometime now. Theoretically, its market cap may be comparable to Walmart but again, high PE does show the clear picture aloneâŚ
More to come.
Regards
Aditya
What is BTST and STBT, is it something for FnO only?