Notes on investing & portfolio

I have been thinking to start a thread to keep note of my thoughts on investing. Better late than never,Trigger came in the form of this article.

To quote,

“Batista has since watchedhis $34 billion net worth plummet some $33 billionover 16 months or so, according to Bloomberg. The big problem? His oil conglomerate, OGX Petroleo & Gas Participacoes SA, lost90 percent of its value over the last year, leaving Batista with a relatively paltry$200 million when including debtshe owes to investors.”

flash back by 16 months:

“Brazilian oil tycoon Eike Batista, who last year was quite literally on top of the world. Life was good, he was eighth richest man on the planet, and once he evenvowed to overtake Mexicoas Carlos Slim as the planet’s richest man.”

Do we tend to become over optimist when things are going good ?

Of late, am having serious debates in my mind about portfolio concentration Vs diversification.

When one is a industrialist like Batista, there might be very few options left to diversify a 34$ Bn oil empire in a short time. But as an individual investor, do i really need to take risks like a industrialist ?

In other words, do i really need to have really high allocation to just 1-2 company ?

Can I really draw inspiration from Buffett’s investment on Amex in this context ?

Not sure, because for 1 Buffett there could be thousand “muppets” about whom I don’t know much.

Popular argument in for of concentration is lack of time to follow many companies (fair enough), chance to double portfolio every 2-3 years. But what’s the down side ?

Corollary to that is, with diversification we can only get mediocre returns or slightly better returns than market ? But even if we get a consistent return of 18%, money can grow by ~28 times in 20 years !!! (We are an economy growing by 5% with a inflation of 8-9%, so 18% doesn’t look very tough to me even now - But it’s debatale)

I am working out a rule for myself, no more than 10% allocation to a single stock (at cost). That too only when the conviction+under valuation combine and present the rare opportunity.

10% is not a magical or scientific number. Just a round & comforting figure. If a single bet were to go as bad as batista’s fortune (ever) , will only set my overall equity portfolio back by only 9%.

Excluding the house i live in & gold for personal consumption, a significant portion of my networth is invested in equities. So, the thought process kind of reflects that position. If i were investing just say 10-20% of my networth into equities, may be i would have thought differently.

Checklist before investing :

1). Outline the allocation to each of his investment categories : equity, debt, insurance, real estate etc. Make sure your allocation to any section does not exceed 25-40% depending on the age, regular income, dependency of family on you, future fund requirements etc.

2). Insurance should get the foremostpriority. Here the amount of insurance depends again on the age, dependency of family on your income, regular income/type of income, leverages(mainly house loans) etc. Make sure to include Equity Linked Insurance Schemes in the overall equity allocation.

3). Make sure you have enough debt allocation which gives regular returns irrespective of the condition of the economy. Invest in such a way that you pay the minimum taxes. eg. investing in the tax free bonds where the interest is tax free or the tax savings infra bonds where the invested amount is tax free.

4). Invest in real estate(apart from your home) only if you have surplus funds which you do not need for the next 4-5 yrs because exiting is very difficult if you have emergency need of this fund.

5). For the equity investment, make sure it is well diversified across the sectors. Not too much concentrated, nor a very much diversified(10-15 stocks). Make sure any one stock does not have more than 15% allocation(20% if you are a seasoned investor). Also do not make more than 25-30% into any one sector. If you do not have knowledge of equities, go for mutual funds.

Hi Manish,

Thanks for your reply.I agree on most of the points you made.

About allocating asset into different categories. I chose to stick with only 2 - Equity & Debt and allocation varies depending on time, age like you said. Debt part currently sits in the home loan a/c. So, that i save/earn interest of ~10% on my debt part and have the liquidity available anytime i like.

I see insurance (term & health) as expense, and am adequately insured. If i were to see, insurance (endowment,ulip etc…) as an investment, i would rather chose a MF. And I tried MF for a good amount of time side by side with direct investing, and found that the direct investing route works better for me. So, this year i completely redeemed all MF’s.

I have had my share of quirks with real-estate (also vicarious learning), at this point i don’t have the time & energy to dive deeper into it, to allocate anywhere closer to 25% of my networth. I already excluded my primary residence from networth calculation. Investment in real estate will have to wait until i find a very favorable opportunity.

My post was focusing only on the allocation into different stocks & sectors in equity part.

Like, i said there is nothing sacrosanct about the upper limit of 10% allocation in a single stock. I guess the same applies for 15-20-30% too. In the end it depends on individual investor’s appetite.

My point still is, if i am individual investor, should i take risks like a industrialist ? like putting a large stake in a single company ?

My answer for myself at this moment is, 10% is my limit :slight_smile:

Let’s see how it shapes up in future.

Manish Bhai,

Don’t you think for young people allocation to equity should be more with age on their side? And one more point I would like to add is separating insurance from investing. I think having a pure term insurance is very important especially for people who have responsibilities. I know people have tendency that they won’t get their money back in term plans but its very helpful in case of exigencies. I have worked in insurance sector and am not impressed with the kind of ULIP plans that come up and their return track record. The return track records of insurance plans is not that great especially comparing it with returns generated by mutual funds. For people who don’t have knowledge about equities, investing in mutual funds through monthly systematic investment plans (SIP) is good way to take exposure in equities.

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Hi Raj,

Interesting topic, which will invite many opinions divided strongly in each side. I will state my perspective, which is somewhat different from yours. To start with, I also have a substantialpercentage of my net worth invested in equities. So probably, we both are in the same boat. Coming to points mentioned by you.

a. A diversified portfolio in itself does not ensure that you don’t suffer large losses. I personally learnt this lesson in 2008, when my portfolio of more than 20 stocks went down by 67% in a year. For that matter, go and look at the history of most of the mutual funds for 2008. All of them made similar losses in NAV for that year, even those ones which had 100s of stocks in them.

b. The natural question that comes to mind is how to protect one’s portfolio. IMO, there is no option other than having a stop loss to prevent the losses. You must define a threshold level, beyond which you will eject yourself out of the market, however painful that might be and however attractive thescrip may appear. Think about it from the reverse perspective: if the scrip was so attractive, it would not have fallen by that much percentage in the first place.

c. Point b clearly demolishes buy and hold strategy, which should be applied only by people who can’t exit certain stocks in a time of panic as their holdings inthe scripare too large to be disposed off. It is very good for Waren buffet to preach Buy and hold, as his holdings in most of the companies is so high that he can’t exit in a panic scenario. Individual investors should not get fooled into following something, which is a limitation for large investors.

d. Point c limits the amount and the scrips in which inidividual investors can invest. The natural conclusion is not to invest in companies with low volumes, unless your own investment is very low. E.g., if a company tradeson an average100 shares daily and its price is 50 Rs,and you have invested 5 lakhs in it, you may have to wait for 100 days( around 5 months) to exit this share, if only your shares were executed. That means with only 5 lakh Rs., you become Warren Buffet of the stock. You can sink and raise prices of this stock at your whim. As a rule of thumb, I don’t buy more shares than daily traded averagevolume in a company. If you have to pass a company coz its daily traded volume is so meaningless that it won’t make an impact to your portfolio, please do so.

e. IMO follwoing b,c and d provides best chances for an individual investor to protect his portfolio. Besides this, one should keep an eye on Nifty/BSE PE levels and when they trade in historically top quadrants of PE(23-28), one should movea substantial % in cash, debt and other instruments, and wait paitently for markets to self correct and give an opportunity. Similarly, if Sensex is in bottom quadrant of PE(10-14), one should become aggressive and even may use leverage. (personally, I have not gotten a chance to implement this point, but whenever I get an opportunity next time, I will definitely follow this).

f. Once, you have your risk management in place by implementing above points, one should only look for best stocks, which have very high probaility of giving high returns. IMO, its difficult to find even 10 such stocks at any point of time in market. The more comfortable number is around 5. Look at how difficult it is, by observing Valuepickr long term portfolio. Seniors are struggling to find more companies with decent perspective of returns in that portfolio.

g. One final point,the companies that you invest in, themselves should not be cyclicals,leveraged, negative operating cash flowcompanies,high promoter pledgedor struggling companies that are waiting for turnaround as that might not happen soon enough. If you do that, it is more likely that even with a reasonablestop loss, you will not have to churn your portfolio often enough. One more caveat is thatyou have to give wider stop losses for the companies that have risen sharply in recent time, sostop loss percentagecan’t be a hard and fast rule and it might have to change with time. But, not having one is suicidal.

And finally, IMO risk management and diversification are clearly two different things, which people generally mix, while there is no anecdotal evidence to suggest that diversified portfolio is more protected.

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It is OK if you are young enough.

You need to be adequately insured first before going for any other investment. It could be term plan, equity plans or debt/pension plans.


Even equity is risky. Real estate is not that risky but need to be very cautious with choosing the property, need to have a long term horizon at least 5yrs.

have 15% upper limit.

For young person like you, who have good grasp of equities, may go for more allocation to equities. But still need to have sufficient debt allocation too. All eggs in one basket is always risky (& rewarding too in good times).

Term plan is Ok. But in case if govt plans to tax the equity returns(chances are very remote), then insurance returns would look more attractive. Here the investments in insurance are tax free and the returns are also tax free.

Very true.

Agree with you Manish bhai. One should have some allocation in debt also.



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** times).

And one more point I would like to add is separating insurance from investing.

Term **


For people who don’t have knowledge about equities, investing in mutual funds through monthly systematic investment plans (SIP) is good way to take exposure in equities.

Very true.


Hi Raj/Gyan

Raj even i had the same concerns about portfolio. And i feel portfolio allocation is more subjective in nature.

Gyan has very rightly covered the risks associated with portfolio concentration.Manish has covered investments well.

Have some points to add

1). Since its subjective in nature. It depends entirely on us. An investor who has been through a bull and bear phase would have been completely tested by the markets.

2). I feel % of net worth in equities and risk bearing potential plays an important role in portfolio allocation.

3). I agree with Gyan on Sensex/Nifty Pe but the kind of stocks which we find here, will not reflect/impact the Sensex and Nifty earnings much i guess. He is quite correct about stoploss.

4). Valid arguments against portfolio concentration is black swan events which can entirely wipe out the portfolio. If we/our dependents can withstand the event then i feel concentration is the way to go .

5). Equities are inherently risky. Feel its better to diversify into other asset class than diversification in equities.

6). If we find a 20-30 % fast grower, with honest management and clean balance sheet i think we can load up.

7). In a concentrated portfolio we must try to avoidcorrelation. Its easier said than done i guess. But fairly if we avoid sector correlation i think even a concentrated portfolio is bit diversified.

Eg. 1-2 Pharma stocks, 1-2 FMCG, 1-2 Financials etc. About 6 stocks with average allocation of 15 % and 10 % cash. Or 3 stocks with varying % allocation. Its entirely on you.

8.The difficult part is to find the stocks and the conviction to load them up. Here our faith comes into play. Men who have made a fortune are those who believed and invested their faith when others didn’t.

*My thoughts are biased towards concentration.

For a salaried person, Employee’s Provident Fund is the best debt investment where the returns are tax free. For businessmen, investment in Public Provident Fund is recommended for the regular debt investment. Here the investment amount is deductible from Income Tax under section 80C and the returns are also tax free. Normally they give 8-8.5% returns. Minimum tenure is 15yrs which is very long. So this becomes a compulsory long term debt investment.

An important key to the answer of concentrated vs diversified portfolio lies in an investor’s aim. If the aim is ‘wealth creation’ then he would have to bet through a concentrated portfolio. However, for some one whose aim is ‘wealth preservation’ then he has the luxury of diversifying his bets into safer and steady returns.

Another key issue to address is risk. Risk is reduced proportionately as certainty of returns from the investment rises Investors have been successfully able to bet higher in high conviction stocks. More certain i am of future returns higher would be my conviction in the stock and that in turn would drive allocations.

Thanks for the excellent and practical Gyan on risk management!

tradeson an average100 Rs,and averagevolume

Excessive diversification kills returns and is certainly no hedge against ignorance. That said, there are sometimes clear benefits to diversification - it protects one against the ‘unknown unknowns’ – things that may affect returns (sometimes meaningfully) but to which an investor might be blind due to various reasons /or things that are very hard to anticipate (e.g. tail events).

Hi Gyan,

Thanks for a detailed response:

a. You are right, a no guarantee against market risk, i think that’s what happened in 2008 ? There are different kinds of risk, would suggest you to read this lovely post from Subra Link:

am m not talking about market risk. Being in market, we all have to live with it.

b. The thought of going out of market, after a certain threshold is a very mentally comforting one, however how do we know that we are not getting out at the bottom, just when things were about to turn around ? What do we do, if just after we getting out markets turn around ? what do we do if markets correct further , get in again ? what we do if it falls further after we get in and touches a new stop loss, get out again ?

I would request you to mentally work out all these possibilities and more, with a assumed 100 investment and present a solid case considering both the mathematical and psychological side of investing. For example , how will a investor will feel & react, if he gets out at say at 80(20% stop loss) and markets turns around to 110 etc etc…

I remember reading Mr. Charlie Munger saying, investor who can’t take market volatility of the 2008 kind once in few years have no business being in markets.

Also, if you are talking about stop loss only from a single scrip perspective and not from the entire portfolio point of view, then remember market reacts to extra-ordinary news with extra-ordinary agility in form continuous stop loss. See, Gitanjali Gems etc in recent memory

c&d. I didn’t study the liquidity part of companies in detail, as my portfolio isn’t of very big size. But then in case of an extra-ordinary event like these formulas may not work very well.

Let me say my central point in another way. Even after doing all the analysis, on company, valuation, future growth, liquidity, non-cyclical, non-negative operating cash flowcompanies, non- high promoter pledgedor non struggling companiesetc etc…

I am still not in favor of putting a substantial %tage of my portfolio in justr 1-2 companies. The reason being there are some risks for which we just can’t prepare. Take this example, which i came to know few days back, from capital orbit blog. I am quoting Kunal

“Look at a listed company called Genus Power which is in the power meters business. There was a huge fire in the Indian Oil depot in Jaipur in 2009. Genus Poweras factory compound was adjacent to the Indian oil depot. Their factory was heavily damaged by the fire.They got insurance, but they could not operate for a few months. They had one factory at that time as I had read earlier.This is truly a black swan event. One that you could not have predicted.”

Hi Raj,…

Hi R.Jain,

It’s right, i was trying to figure out what will be the impact of ‘unknown unknowns’ on one’s portfolio if we have a very high allocation to just few stocks.

Hi Raj,

I think we need to categorize the type of risks, and assign a probabilityto that risk materializing. Some risks will be highly probable, while others will be true black swans. Take for example: country risk, which is mentioned as one of the risks in your favorite article. I will assume that by country risk, the author means that our country can be attacked by another country. What is the probability of that happening in our lifetime. Maybe, once in 15-20 years. And what is the impact of that? May be a 20-30% down movement in the markets, unless our country gets completely destroyed, which has even less probability of happening in our lifetime. Compare that with the other risks that you take in your life. E.g. Walking/travelling on a road, flying by airplane etc., and outcomes of those events. If I compare these, I find it meaningless to fret about country risk and I will not even bother about it and for me it ceases to exist. Most of the risks mentioned in that article fall in that category. Some of the risks mentioned there can be neutralized by taking different kind of bets like currency risk can be balanced by buying Ajanta and Astral kind of companies in equal proportion as one gains by currency appreciation and the other one by depreciation. So, there are risks that you need to bother about and there are risks which are there just for academic exercise. Just because there are numerous risks, we should not start bothering about all of them.

Now, what are the risks that we should bother about. Again, I think based on their frequency and their ability to hurt us, we can make some categories. Here is my list.

a. Risk of ignorance - If one doesn’t know what he is doing in the stock market and why a certain share will make money for him, he is in deep deep trouble. If one does not know why a company should have high ROE, low debt, positive cash flow, one would find the going really tough in the market. Every now and then, pundits will come on TV and preach them about some highly leveraged company or companies with dubious promoters; as to why this is the next best thing. I don’t think we should forget about Gitanjali Gems,Arshia international etc. These are good lessons that stories don’t make money, actual delivery does. One must also understand that one’s ignorance is the strongest instrument in the hands of the others to influence one in buying something, which he would not have bought otherwise. As there are so many vested interests (TAs, FAs, MF Managers, Business news channels etc.), the probability of being hit because of this risk is very high. Actually, there is a whole ecosystem out there, which is working against you to confuse you and make you commit mistakes. I would certainly worry and try to avoid this risk. The best way to avoid this risk is to read diverse books, think about them, internalize the concepts, make your own opinion, come to places like valuepickrand read all the discussions on it.

b. Market Risk - This is the second biggest risk after the risk of ignorance. It happens almost every alternate year and can get you down by 30- 95%. It is highly frequent and extremely painful, if you get into it. The pain of getting it is much much bigger than selling something out at the bottom. If you are sitting on profit and sold something with an acceptable loss or reduction of profit, you will be far happier, compared to seeing your net worth go down to 1/3rd of its original value. E.g., You worked your whole life and gathered something like 3 croresas your retirement money. Imagine your pain to see it going to 1 crore and having to go through the pain of working once again. It can leave you paralyzed. Charlie can happily preach people to go through 2008 kind of pain as his portfolio was down only by 10%, his portfolio was invested in stocks whose profits don’t go down substantially during downturns, he is investing others money and hence does not care much and he would have moved substantially into cash in 2007 as he would have followed various indicators of heating economy(high interest rates, top pequadrant etc.). I wish Charlie had lost 2/3rd of his net worthin 2008. Then he would have some different ideas to suggest to people with equal brilliance. Remember the risk number one, there is an ecosystem out there.

3). Stock specific risk - This risk definitely exists with any portfolio. That is why I also don’t suggest having 2 stock portfolio. In a two stock portfolio, this risk is definitely higher. People invested in Hawkinswill know that. But at the same time, having many more stocks does not help one either, as in many cases, only 2 or 3 groups of stocks in the market will be doing good. And hence most of your stocks will be correlated to each other and does not provide enough risk cushion.

Finally, as not everyone is equally skilled in the markets and cannot devote the same amount of time in the market, everyone will have different risk profile and different mitigating strategy. At the same time, taking decisionsbecause there are many types of risks and not identifying which one to tackle may lead to poor strategy.

One more thing, Stop losses and fear of exiting at wrong time looks really difficult for people who are not following them. If you start following them, you don’t worry about looking stupid. And with time, you become a much smarter investor, as with cash in hand and defeatin mind, you tend to think much harder. If you don’t exit a stock or are unwilling to exit it because of a substantial loss, you stop thinking and start praying. And If one’s shares continue to fall even after prayers, you can understand his mental state. First the person loses faith in himself and then he loses faith in God.

Stock investing becomes very simple n rewarding if following rules are never forgotten

  1. Ethical Promoter

  2. Good ROCE

  3. Good size of opportunity.

The compounding machine fulfilling above criteria will seldom fail over a longer period of time till the above criteria are being met.

Hi Gyan & Vivek,

Thank You!! Good learning’s :slight_smile:


I also face these problems of concentrated vs diversified,how much to invest and where to invest,what is a reasonable rate of return one should generate and what is best investment.Having wasted so many years trying different things slowly in last few years I started following strategy.Hope this helps you.

1)Any kind of investment does not just require money but your valuable time also bear this in mind.Hence time investment is also equally important as money.

2)The best time and money investment is your career.Try to upgrade your professional skills all the time.This requires attending courses etc and consumes a lot of time and money.But this is never going to desert you and is your best investment.

3)The next best time and money investment is buying a primary residence.Do not compromise here and buy a cheaper property 50 kms from your workplace and spend four hours everyday commuting.

4)Next best investment is try and spend time and money with your family and get pleasure from small moments of happiness.When you get older you will realise that no

amount of money can replace this.

5)Next best investment could be children’s education.Put them in best schools,spend money on providing them good sports facilities,music/dance etc and let them have best

facilities which you can afford.

6)Get properly insured

7)Have a good car and travel different places which you can afford now.Do not wait for big money—big tours.

8)Have some money in FDS.Whatever money is left to you after doing above things (offcourse in a way one can afford) try and put atleast half of it in FDS.

9)Remaining money can go in stocks.Any money going in stocks without satisfying above needs is a greedy speculative money and is against larger interest of your family.You will realise that very little money is available to invest.

  1. Log on TED OR valuepickr and list ten best opportunities.Grade them on one to ten scale and bet on top three.Keep an eye on other seven and have a dynamic concentrated portfolio.

I am following this and I have not become superrich but I am happy on most fronts.