Notes on investing & portfolio

Q&A: Questions & Answers Portfolio Q&A
41

This is how my portfolio is organized currently.

50% - into companies where I can take a view of at least 18% growth cagr for next 5 years. More or less modelled on learnings from TED. Comfortable to hold roughly 10 companies in this block. %tage holding of each keeps changing depending on valuation and fresh Cash addition. Mostly buy and hold kind…not keen to sell anything from this block.

Main holdings : page, HDFC bank, ITC, Asian paints, gruh…

Have been buying these companies for last 3 years on and off. I am eagerly looking to add more companies in this universe. Recently bought lupin and sun pharma.

40% - into companies where the current growth rate is good but difficult to take a 5 year kind of view. We live quarter by quarter :slight_smile: meaning thy require more stringent monitoring. I intend to hold them long period time too but With changing valuation open to sell one member and induct another one. Again 10 companies is the limit in this section and am trying to stick to it. Modelled on learnings from valuepickr.

Exampl: Cera, Atul auto, Kaveri , pi, astral, accelya,bajaj corp, Hawkins,repco, ajanta pharma.

10% - into companies where the conviction is low, but I want to participate nevertheless. Don’t ask why :wink: Hopefully my tuition fees is mainly from this section and I can avoid major blunders in the other 2 blocks. But most companies in my portfolio start from this block, as starter position. It takes me time, sometimes months to read up and develop enough conviction to load them up and move them to other 2 blocks. So, it hasn’t been that bad a decision. Other times they get the boot after being in this section for sometime.

No limit on number of holdings. But mostly 5-10.

Example: AstraZeneca (still holding) , navneet publication (sold)

1 Like
42

Good clarity of thought Raj.

All the best.

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43

Raj,Thanks for sharing this nice article.

http://arvindt.blogspot.in/2005/09/prof-called-sanjay-bakshi.html Link: http://arvindt.blogspot.in/2005/09/prof-called-sanjay-bakshi.html

:))

44

This BCG report that i shared in the Page thread - "The Tiger Roars"is a nice read. Not because i think it's perfect or something but because it gives very nice "birds eye" view/estimate of where people are spending money and where they are likely to spend money over next decade. I believe, as investors it's our job to be aware of these trends ;)

Here are some notes from the report.

The report is divided into 4 parts

1. Size of the prize -Overall consumer spend is likely to expand 3.6 times between 2010 to 2020 from $991 billion to $3.6 trillion. (a 14 percent growth rate, or 8 percent in real terms)


 Spending, 2010
($billions)		 Number of times growth Spending, 2020
($billions)
Food 328 2.7x 895
Housing & Consumer durables 186 4.0x 752
Education & Leisure 71 4.2x 296
Clothes & footwear 59 3.8x 225
Health 49 3.8x 183
Others 129 4.4x 570
Total 991 3.6x 3584

The highest growth area of 4.4x in "Others" include personal care, baby care, loan repayment, holidays & social gathering.

Would be good to have comments from fellow valuepickrs, if the broad trend is correctly captured in this data. Is our YoY spending on the areas highlighted as high growth here increasing at a higher rate compared to low growth areas ?

45

Dividend yield of Portfolio.

When i started direct equity investing some 3 years back, I was very influenced by a investment blog tipblog.in. Primary idea was to generate a secondary source of income in form of dividend yield through buy hold approach. I started investing in companies which were then available at ~5% yield like Balmer Lawrie, Tata Investment Corp etc…

As i see it today, had i stuck to that investment style, while my PF div. yield would be high, the overall PF return would have been very poor.

Mainly because the growth in earnings in those kind of companies has not been very brisk and market price has reacted accordingly. With official inflation in single high digit and unofficial inflation in low teens(?) I no longer see any point of long term investing in companies which are not growing their earnings at least at a rate >15% and preferably higher than 20%.

Probably companies which are growing at about ~10-15% are either just standing still, gaining from general inflation or they probably have no pricing power. These days am trying to focus more on the prospects of earnings growth & Free Cash Flow generation and promoters intention to distribute it to investors. Current div. yield is only a minor part of the equation.

In this context, I like to think of how investing in Atul Auto has played out, around May 2012 at 85-90 rs. (when i first bought it - adjusted for bonus) it had a yield of ~5% at rs 4/-, this year it will probably give out rs 8/- in dividend which will be ~10% yield on the cost price. And all this is just bonus, the stock price has tripled in this period.

Current portfolio yield is close to ~2% without over emphasis on current dividend yield in stock selection process. Currently Pf consists of companies :

First type, which are growing at rapid rate (~>30%) and seem to have the prospect to continue doing so for some more time with an yield of ~0.5% (like Astral).

second types like Atul Auto, Hawkins, ITC which can grow earnings in range of 18-25% and have 2-4% yield

Third type like Accelya, which have 6-8% yield , can grow close to 20%.

So, if one is looking to replace his primary source of income (like job) with income from dividends, then the goal of creating a corpus close to 50 times of annual salary (or annual expense?) makes sense.

46

Hi Raj,

A very good point from your end. But creating a corpus close to 50 times of annual salary (especially for a guy like me who has just 3.5 years of experience) is too much? Sometimes even I think of leaving job and getting into investing full time. But with small savings and lot of responsibilities, I dont think that will happen atleast for me in near to medium term.

(PS: somewhat unrelated to your post but thought of sharing it.

Dividend yield of Portfolio.

47

Hi Ankit,

Welcome your comments. Reminds me of something that Charlie Munger once said in an interview.

Not verbatim - “everyone in this room wants to become as rich as i am, only problem, they don’t want to spend as much time as i have spent in reaching there :)”

Please take no offense, it’s just something that flashed my mind and I am in the same boat as you.

But see it like this, if you have saved at least one year of your earnings from the past 3.5 years, and you can generate returns of 20% on it, and keep adding from your future earnings that day would not be far :slight_smile:

In my opinion leaving job and getting into investing full time will not help to solve your problem, rather it has potential to compound it. I wouldn’t advise it at current stage.

48

Ya that’s true Raj. Apart from spending time on research, I will have to be patient and give time for the investments to grow. That’s what I have learnt from my investing experience as well as from other senior ValuePickrs. And yes, long term return of 20% is decent kind of return that one can expect over long term with the kind of portfolio we have in ValuePickr.

Hi Ankit,

:))

49

Why the urge to leave your job at such a young age? Learn to enjoy the job…

Full time investing doesnt need too much time… In fact around 5-6 hours a week including visits to valuepickr should be enough…Then what will you do in your spare time? :slight_smile:

50

Completely with agree with Hitesh. When I said “I am in the same boat”, I was referring to my pf size being small, and not about job, hope I didn’t confuse ankit with that :).

Although in a capitalistic world, capital has great value and one can use it to get material things, there is no substitute to being productive and contributing to society to the best of ones ability.

I feel, having financial independence somewhat helps in improving ones risk taking ability be it new job roles or new ventures.

51

**

Ya agree with you Hitesh Bhai… :slight_smile:

What I am more inclined to is working in an equity research company(like Vinod) or starting my portfolio management firm (thats a very very long term plan after I have enough experience and as Donald says after seeing two - three market cycles). The problem is I have limited options (or hardly any options) as I don’t want to leave Ahmedabad (working in Mumbai doesn’t excite me much).

Even my current job as credit analyst is pretty good in a sector (I have lot of stories to tell you when we meet next time about how ‘jhol jhal’ happens even in big companies in this sector) which I would hardly invest my personal savings in.

Thanks

Ankit

Why

** job…Full **

:))

**

52

Hi Ankit,

Can you share these Jhol Jhal’s :)happenings in companies,here Corporate Fraud/Misdemeanor@ Value Pickr.

53

Hi Hemant,

This relates to the infrastructure sector and how companies do double leveraging, bidding aggressively for projects to boost their order book etc. I cannot share the particular names of the companies and wouldn’t call it fraud as well as that is how these companies work. As an analyst, we can definitely figure out that something is wrong here but that is how their business model works. That is why you have lot of CDRs happening in infrastructure sector like Gammon, HCC etc

:))happenings in companies,here Corporate Fraud/Misdemeanor Link: …/…/lessons-from-corporate-fraud-misdemeanor-in-public-domain/308781136 @ Value Pickr.

54

Sorry to screw up this thread with something off-topic, but in relation to the immediately previous question-answer, it seems relevant.

Most of these infrastructure companies, especially those in the roads sector(for example IRB Infra or ITNL), have two sources of income in their consolidated balance sheet-construction income, and toll/annuity income. Usually the construction income arises in the standalone entity, and the toll/annuity income arises in SPV’s created for each project. Almost the entire income in the standalone entity is construction income, while the entire income in the SPV’s is toll/annuity income. The companies do double leveraging, as stated by Ankit-they have a 1:1 debt equity ratio in the standalone entity, and 3:1 (or therabouts) in the SPV’s, with a consolidated debt equity ratio of around 3.5:1 or so.

The only profits of the standalone entities are from construction activity done for the SPV’s. There is no outside contract. Yet the standalone entities show handsome profits. But the profits are derived from their own SPV’s. So how is the transfer pricing done between the SPV and the standalone entity? What is the test to figure out whether or not the profits of the standalone entity are inflated by raising the project cost of the SPV, (and therefore also raising more debt in the SPV)? How do auditors certify these transactions between the SPV and standalone entity as based on “fair” pricing? And what happens if for some reason new projects dry up? How should we as investors value such companies?

55

Hi Samir,

As you have rightly mentioned about the source of income for consolidated profit and loss of an infrastructure player, the standalone entity also derives income from dividend/further leveraging of toll receivables in the future (if their is a tail period in a project) of SPV.

Coming to transfer pricing question. All of these project are bidded and company with lowest bids (the bid can be in various forms like lowest negative grant from NHAI/highest positive grant from company to NHAI/lowest annuity in case of annuity projects etc depending on the project and traffic study report) wins the contract. What has happened with Infra companies is that during the past 3 - 4 years, NHAI has not been able to come up with its enough road projets (it has not even able to achieve 50% of its target road development over the past 3 - 4 years), the companies in a bid to show growth in their standalone entities bid for these road projects aggressively. They tamper with the traffic studies and show hunky dory type of projections of toll in future years. The standlone entity recovers its construction cost along with profits but the SPVs keep on reeling coz of high interest and repayments as the project once operational is not able to show the growth in toll revenues as projected by the company. There are lot of consultants involved here for banks like traffic consultants, lead engineer of banks etc. However, less than 20 - 30% of the projects are able to achieve the kind of traffic projected by the companies. Most of the SPVs rely on the parent company to infuse money into them so that they can repay their debt obligations. In my opinion, its sort of securing your presnt by denting your future for the standalone entity.

I am not aware about the valuation of projects from an equity point of view but usually they follow ‘sum of parts’ method where they assign some value to the standalone entity and add value of particual SPVs into it.

56

Investing in stocks:A much better alternative to starting one’s own business - Part I

Link to a superb post on Dhwanil’s blog, posting the link here as i can relate to most of what he has written and have thought about at different point in time.

57

raj,

i found your allocation very interesting. i also would like to model my portfolio on similar lines, but the number of stocks in ach category would be max 4-5.

Category A

I aim 10x in 10 years, this is the bench mark and i try to find companies that can fit into and allocate max 40%. so far i could find gruh, page. it doesnt mean we buy and forget for 10 years, these are buisnesses that have long visibility.

Category B

fast growers. max 50%, and 4-5 stocks. comapnies that are in growth path and visibility for next 3 years atleast. like astral, kaveri, accelya, repco, hawkins, mayur …

Category C

max 10%, basket of few stocks. like sugar cyclicals, industrials…

:)) ;))

58

Hi Bala,

I too have been thinking about reversing my allocation between Cat A & B. i.e., 40% to Cat A and 50% to Cat B.

But then i think, I am biased due to how well the stocks in Cat B have done recently, they seem to do well in market recovery phase.

Idea behind having 50% in strong Cat A names, is to get growth along with protection in case of market crash. So, from time to time the allocation levels can be toggled between the 2 categories i guess. Aug-13 seemed to be time to get 50% in Cat B while right now it looks like time to be 50% in Cat A.

On, no. of stocks, if one know’s, what he is doing very well, then 10 is good number.

59

Hi Raj,

When it comes to visibility in earnings for me a company like tcs belongs to the A category .Somehow the IT sector has been overlooked in most of the portfolio construction in Valuepickr community .IT along with pharma occupies almost 50 pc of my portfolio followed by FMCG .As I am relatively new to valuePickr and ted I missed opportunities in Astral,mayur,kaveri and I have only recently started doing sip in these companies .In any case they will not prove to be a multibagger but provide decent compounded returns so they belong to B category for me .

How do you resist the temptation of not selling a stock when it doubles from your buy price(if it resides in your B or C category) .Pi being a recent eg .Though I had intended to hold it for a long term ,I sold it out around 210.This is something I need to learn to avoid letting a multibagger slip from my hands :slight_smile:

raj,

i found your allocation very interesting. i also would like to model my portfolio on similar lines, but the number of stocks in ach category would be max 4-5.

Category A

I aim 10x in 10 years, this is the bench mark and i try to find companies that can fit into and allocate max 40%. so far i could find gruh, page. it doesnt mean we buy and forget for 10 years, these are buisnesses that have long visibility.

Category B

fast growers. max 50%, and 4-5 stocks. comapnies that are in growth path and visibility for next 3 years atleast. like astral, kaveri, accelya, repco, hawkins, mayur …

Category C

max 10%, basket of few stocks. like sugar cyclicals, industrials…

60

Hi Sourabh,

Congrats on having 50% in IT & Pharma, am sure the portfolio must be doing well in this environment.

Mea Culpa on missing the Pharma & IT gravy train.

Sometimes i feel very dumb about myself for having missed the IT bandwagon because i work in IT sector. But then, some 3 years back, when i started investing, the situation was different for IT. Rupee was in 40’s and lot of experts were writing off the IT sector as another commodity business, incapable of pricing power and unlikely to sustain business growth from thereon etc etc… and i didn’t had any opposite view either. But then, as we all know, rupee went to 50’s and then 60’s and many a thing changes for the IT sector. Still, I hold Accelya in Cat B, as it’s business model is not very people intensive and based on products and revenue is based on a transactional model. No entries in Cat A in my pf from IT, TCS can be considered a worthy candidate, from what i understand.

I believe, Pharma is a more complicated business for a beginner to understand. So, i am holding sun & Lupin in Cat A, as they are considered to be market leaders. Do hold Ajanta & Auro and overall trying to improve my understanding of the sector.

About your Q, how do we hold to a company once it’s already a multi-bagger. Personally i am not very inclined to sell a company where i already have multi-bagger returns. The reason is simple, most of the time, it means, i have held them for long time and I have a relatively better understanding of those businesses. Once we understand some businesses better than others and find that all the levers for growth are still intact then where is questing of selling ? The case for adding on declines becomes even stronger.

Finally, in investing, what we missed, can’t hurt us much. It’s what we hold, which potentially can.

:))