Disclaimer This post is mostly about highly concentrated investing and this is just one way to invest and many of the VP veterans have done very well without the need of such concentration. Examples of stocks should not be considered as advise
My investing journey started in 2013 with 20 stock portfolio trying to live by Mr Buffett quote of having a punch card with only 20 investment decisions. That time stocks selection was mostly based on reading VP and finding cheap stock with good ROE and good growth. The portfolio did well till 2017 end.
2018 -2020 was tough period with lot of lessons. Realised the importance of business quality, peak margins and saw lot of watchlist stock do better than portfolio stocks so decided to switch to diversified portfolio - 40 stock portfolio
After Covid fall saw lot of portfolio stocks like Bajaj Finance , Alkyl Amine, Saregama moving 10x and more but given low allocation not even single stock on its own end up moving the portfolio in a significant way
Had a chance meeting in January 2023 with fellow VP and senior investors where they had encouraged me to aim for higher returns (Till then I was happy with my 20-25% CAGR ) and be more ruthless with stock selection. Post that I decided to modify my Investment Philosophy around 4 Goals
Goal 1: To get a 1000x portfolio return (or roughly 2^10 or 10 portfolio doubles)
Goal 2: Aim to compound at 40%+ CAGR vs getting satisfied with 20%-25% CAGR
Goal 3: Find ideas which can grow earnings at 40% - 45% CAGR over 3 years (3x in 3 years) It’s difficult for business to grow topline at 40%-45% CAGR so need help of operating leverage
Goal 4: Find business which are unique, where triggers are coming in next 1-2 quarters which can change company’s margin and growth trajectory completely (not because of cycical factors but fundamental improvement) and most importantly investors are not able to grasp the drastic improvement in business all this can eventually lead to multiple rerating
Irrespective of whatever amount one starts if good chunk of your networth is in equities and you are able to grow that amount by 1000x you are most likely set for life
There are multiple ways to achieve this goal :-
Invest in good compounder stories growing at 25% so that your portfolio grows to 1000x in 30 years (10x every decade)
Other way is to invest in say 5 ideas with 20% allocation each
Each stock should have potential to become 5x in 2-3 years (3x growth in earnings in 3 years and multiple expanding) or double your portfolio in 2-3 years without help of other 4 stocks
So if 1 stock is able to double your portfolio every 2-3 years you just need 10 such stocks (with high allocation) to achieve your 1000x portfolio
If you had 20 stocks each with 5% allocation then for 1 stock to double your portfolio it has to become 20x which is way more difficult or you require 100 such ideas each going up 5x to achieve same 1000x portfolio
Now lets talk about downside What if 1 position become -50% so net portfolio impact is -20% if you are aiming for 20-25% CAGR big impact but if aim is 40%+ then you end up making 20-25% (Provided 1/5 idea did work )
Instead of aiming for 10 bagger, 50 bagger or 100 bagger, aim for 5 baggers (much higher number) over 3 years , rinse and repeat
If a stock in portfolio become 5-7x-10x and you had less than 10% allocation say 5% allocation it is a big miss it was among those 10-15 ideas you needed in your life and just because of under allocation it didn’t change your portfolio it’s a big stupid miss, you had done all hardwork to understand and keep idea in portfolio and just because of lack of conviction you could not put enough allocation
Limitations of highly concentrated approach
- Requires Clarity of even quarterly numbers and if it is a miss vs your projections you need to be sure that next 1-2 quarter will make up for this quarter miss. Have seen that there is Never a single bad quarter, highly likely more bad quarter are coming and bad quarter doesn’t necessary mean degrowth even 20% growth is bad quarter as aim is 40% growth unless future growth can be 60-70-100% growth
- Requires you to constantly think and read about your portfolio companies - its international peers, competitors if they are doing concall, read about industry megatrend - find 3 big triggers and 3 big dealbreakers - you aim is to be among the most well read investor in the country on that company and one who understands both risks which can break the thesis ( not general risk but company specific, Industry trends specific risk). I still think that information edge and connecting the dots is the biggest advantage that an investor has specially in this world where everyone wants to take shortcuts
- FOMO Have to skip lot of Companies which are run by good managements but no clear visibility such companies can also deliver very good returns
- Can’t afford multiple wrong calls - hit rate has to be high
- Portfolio swings are too high Can easily see double digit monthly returns both positive and negative
How and where to find such ideas
Companies earning yearly profit of 30-50cr, business having gone through cycles and can grow 50cr profits to 300-500cr PAT, anything lower like 10cr to 30cr most companies are structurally weak ( most case wither commodity product or 1 product dependency) and 1 single macro event might significantly impact the company
Anything above 500cr starting PAT means ending PAT has to be 1500-2000cr very few companies have done that so Ideal starting market cap is around 1000-3000-5000cr (with 30-100cr PAT) which can become 10,000-30,000- 50,000cr market cap over next 3-5 years
Such specific filtering criteria means you have to study very few companies and eliminate fast (Remember the goals - 3x in 3 years in earnings, good chance of multiple rating and unique business rule Hardly 30-50 companies you have to study in detail in a year
Ideal candidates are companies who would have invested a lot of money and time in creating scalable/ exponential growth products. Companies whose 1 product can change the companies trajectory and at same time they have multiple such projects/optionalities. It is similar to a spring coiled for last 5-10 years, the next 2-3 years will compensate for previous 10 years of low/no growth. You want companies who haven’t done much in last few years so that even if stocks become 2x people won’t believe the story. Some examples
-
Shaily Themes- Pens/Autoinjectors, Consumer Electronics, Semiconductors
Management bets like CRC caps, Toys and so on didn’t work out so most people did not trust them when they had guided in their Q2FY24 call that their margins will improve structurally with healthcare number scaling. If you had done study of global listed peer -Ypsomed and gone through their call you would have realised that Ypsomed does 35% EBITDA margins in their Own IP pens and even at 10x size of shaily was talking about growing sales 5x in 5 years -
HBL last 10 years 300cr investments in R&D which has led to high margin scalable products like Kavach, Fuze, Defense batteries
Just had to grow through their annual report and attend AGM to understand the amount of optionalities this company had. -
Wockhardt WCK5222 NCE spending 100’s of crores, WCK 6777
Had to grow through VP thread and speak to some doctors to understand why WCK5222 could change companies trajectory -
Garware PPF, SCF value add proportion scaling
Had to look at the change in amount of disclosures, their concalls as well as what XPEL which is one of the biggest player in US markets is saying about industry -
Dynamatic Technologies with Aerospace business scaling and Dynauton as big optionality
FY25 AGM along with last 2-3 years Analyst meetings which is available online talks about their plans and vision
Where to look for next set of ideas
- Quarterly Results - India and US markets (for themes)
- AGMs
- 52 week high list
- Services/websites like Wrap and Kavi
- Your friends high allocation ideas
- Can start looking at stocks which has returned say above 50% for the year and also at stocks whose stock returns for last 3 years were 40%-45% CAGR (3x in 3 years) Every year you will find 50+ companies. Many companies who will eventually become 3-5x in 3 years will have to go up 50% for the year first
Any idea you like even if you don’t invest put your views and projections in notes in screener /note app and keep revising it and incase it turns out a 5-10 bagger and you missed it think hard about it why did you miss. Many ideas you would realized you could have never seen the key trigger and it is ok if you miss such idea
On Selling
- Since it is very high concentrated strategy you need be more ruthless. If for whatever reasons, thesis is delayed by a year, you sell and reenter after a year
- On Quarterly hiccups - if it is a miss vs your projections you need to be sure that next 1-2 quarter will make up for this quarter miss.
- Sometimes you will realise that the underlying theme is no more unique and there is not much differentiation as more number of listed players have come in so even if company can still grow at 30%+ chance of rerating has gone down significantly so need to freshly evaluate (Example can be co working space)
- Finally on stocks that has done well (run up 3-5x), you have to be extra careful since most of the re rating would have already happened. People don’t need big reasons to exit. Have to constantly think what can be the maximum upside in next 2-3 years from current market cap. If the maximum upside is 50-100% , I normally think about reducing/exiting. Need to think if there is still some big informational asymmetry - or newer growth areas which can lead to outsize performance even after initial 3-5x.
I would highly recommend the following websites/services
- Screener (for tracking, screening and note taking),
- The Wrap (weekly meet and Data Tools)
- TIKR (for finding themes working outside India and tracking peers/customers for Indian companies)
- Tijori (Market Monitor and Idea Dashboard)
- Kavi (Transcripts)
- VP (Detailed threads)
Advise for new investors who want to try out such high concentrated portfolio strategy
Try to allocate 10%-15% allocation with 1/2 position and see if this investing style works for you rather then going All in with 5 stock 20% allocation strategy
Will finish with 2 interesting quotes which I have seen work in my own life
