Omkar's Portfolio Analysis and Discussion

Caveat – This message is personal and by no means I am trying to generalize the arguments. This is based on my observation and I don’t have any empirical data to support this

My ‘’capacity’’ to generate long term returns for next 10+ years is mid to high teens. Following are the reasons

  1. No market wide depressed valuations – Going back by 10 years - During 2010 – 2013, valuation were cheap across the market. Example - Suprajit was trading at 5 PE. Ajanta Pharma 8 PE. Now both of these companies trade at sub 20 PE multiple. Therefore 3 – 4X returns were achieved, just by rerating. This was the story across the market. Today(even after current correction) odds of broad - based rerating in next 10 years are very low and most likely for the most of companies returns will mirror earnings growth for next 10-15 years (this is my judgement).

  2. Talking about earnings growth, very few companies (rather 1 or 2) can keep on growing 25%+ for 10-15 years. Usually growth is lumpy, high growth for 2-3 years then growth fizzles out for few years and then company grows again. That means, to generate 25%+ returns based on earnings growth alone I will have to find new opportunities and churn large part of portfolio every 2-3 years.

To combine both the points - finding rerating + growth or 25%+ earnings growth stories (aka separating wheat from chaff) needs lot of continuous hard work and ability to connect dots as one combs through annual reports, conf calls and other sources of investment material. Unfortunately these are not my key strengths

BUT – ‘’Dil Hai ke manta nahi’’. Mid to high teens returns are ‘’average’’. Investing in select blue chip names/ mutual funds can give me mid to high teens returns over next 10 years. How can I tag myself ‘’average’’???. That means I will have to take extra risk somewhere to generate returns beyond my ‘’Capacity’’. Usually this dilemma invites lowering risk management guard. This lowering of risk management guard reader will find in the ‘’Allocation’’ of my portfolio. This is my attempt to go beyond my capacity of – mid to high teens to may be early twenties. Investing is very wild. In all other aspects of life we aim higher so that we raise can raise our bars. In investing aiming higher may actually lead to achieving lower. Whether I will succeed in my attempt or succumb to poor risk management, time will tell.

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One more variable to think is how much of your “liquid” as well as “overall” net worth you are putting in equity. If it is low, higher risk can be fine, if it is high, even a 15-20% cagr over long term plus dividends can do wonders…just my thought and would like to know what you think about this larger perspective of how much your overall needle would move…if risk is higher, i may not be comfortable with putting more of my networth so end result maybe lower…

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Hi Investor No 1

Agree to your point

When I started investing I was all small cap, now I would like to go for more multi cap approach

liquidity, I would call as the necessary infrastructure we will need to stay the course. It definitately helps to improve ‘t’ in p(1+r)^t. Above post was more about ‘r’

If above is a Compound interest formula, then what would finally matter is “A” where A= p(1+r)^t. It would depend on all variables. If I go for higher “r” inspite of knowing that it is not my strength, I would not be able to allocate higher “p” to begin with.

Add to that, in cases of crashes and bear, I would be more fearful of the volatility and my own expertise that I may end up taking wrong decision in stress/panic/hear say and that would end up reducing the “t”.

Instead, if I target higher “p” , higher “t” , with even a lower “r”, the A would be much more meaningful…

So whether an investor is “average” or not would depend on the final “A” and not on the individual pieces…and final “A” would be greater if we stick to our own strengths.

The true competition is only with self…

Above are just my thoughts and I maybe wrong in my assessments. Hope I am able to convey what I wanted to…

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Investor No 1

I agree to your points. I have also written similar argument some time back as mentioned above

Point of above post was to what limit I can stretch ‘r’ to let P and t do the trick. Tuning and managing ‘r’ and ‘t’ is very personal and each investor can create his/her own art in the portfolio

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Just so that I clarify - this was a sarcasm. I dont intend to call anyone average. I am a poor writer may be as things are not coming out the way they should be

@OmkarT @Investor_No_1

Great points wrt p,r and t. I would like to add another perspective to the same thought process is that we talked and analyzed p,r and t more from return perspective. Let us see the other dimension from risk perspective.

It is the drawdown sometimes will be nerve wrecking even for conservative investors if very large sum is on the equity table. For example, some one has built retirement corpus say of 5 crore and is put on the market to work and is mostly invested in blue chips expecting 15% cagr. Even for such individual when market crashes by 20% then in all probability his corpus will dip by 20% atleast if not less which will translate to drawdown of 1 cr approx which may be equivalent to 10 years of expenses.

This bear scenario of slightly long term of couple of years will be intolerable in most of the cases.

Therefore i always suggest to those who are planning early retirement or got seduced by FIRE concept that higher % of networth shouldn’t be in equity unless his debt portion covers atleast decade of his expenses.

Nice discussion. Thanks.

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Cannot agree more and hence if and when such bear market happens, will be the biggest test of investors, their temperament, risk management and portfolios…

Also, that is why most recently in my evolving thought process, I have introduced in my mind a concept of % of “liquid” networth in equity…

Many times we calculate the % of networth alone, however under such long bear markets or any adverse situation in external environment, our liquidity would get impacted…hence the % into equity should be a comfortable number with respect to not just our total networth but also and more importantly of our “liquid” networth (total liquid assets that we have)…

I am still not sure what should be a healthy percentage into equity with respect to both - total networth (liquid + non-liquid assets) and “liquid” networth…thoughts still evolving here…would be nice to know @Vijay_Kiran @Malkd your thoughts

Thanks for bringing a practical example and thoughts welcome.

Apologies @OmkarT for taking space here in your excellent thread but your formula triggered this much needed discussion…Thanks

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I had read in J.L Collins book, who advises Index Investing …That if your retirement corpus is 25 times bigger than your annual expenses…Then that is sufficient. Lets says your annual expenses are 4 Lakhs then Retirement corpus of 1 crore is enough. Because even if you withdraw 4% of your corpus( 4 lakhs annually) for expenses…still the remaining corpus is growing at Index rate of return of 10 to 12% will more than compensate for the withdrawal amount. As far Liquid or non-liquid net worth…You should not take into calculation any non-liquid assets like your house or ancestral land etc. And by the time you reach the retirement age, you should try to convert all illiquid asstes into liquid assets as much as possible.

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Now since this thread has become around 14-15 months old, it is a good time to revisit all the ‘Conceptual’ posts and see if I have changed my thought process behind the post or it has remained same. And where it has changed (I know there are not many of them where I have changed my original thinking) what is the reason?

Over coming days/ weeks I will try to compile this assessment

From the investment thesis point of view, all the original thesis are intact. There is not much change over there

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There is nothing wrong in changing the thinking…
“When the facts change, I change my mind-what do you do, sir?”
— John Maynard Keynes.

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Went through the Q4 confcall of SJS ENterprises. I can not partner with managament for long term. Nothing wrong with management but it is just that our tuning does not match

Company does not qualify to 2. My Investible stock universe

Eris – Life cycle of an ‘Idea’ and next steps

So Far -

  1. I posted a short write up on Abbott on 21st Jan
  1. Harsh Beria suggest me to look into Eris as it has same business model as Abbott – 21st Jan

3. I added Eris in my watch list once I got a confidence that I am comfortable with risks and I can take descent judgement on business – 28th Jan

4. Went through few conf calls and investment material available for the first time to understand what’s happening with the company in little bit more details – 24th Mar

5. Eris makes to the portfolio with tracking position as I thought it can potentially add value to the portfolio by making it more robust and spreading risk – 8th May

6. Went through conf calls and investment material second time in little bit more details compared to step 4 to understand what should be the ‘Focus’ of my Investment thesis – 17th Jun

Next Step

7. I am going go through conf calls and investment material again in far more detail than step 4 and step 6 to find and arrange ‘‘information’’ around acquired assets in following format

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I never thought about analyzing a company this way. I always looked at the numbers because that is what I understand and good at but your post made me think. It is important to look beyond numbers and take a deep dive into the business model, etc. Thank you for posting such good content.

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so currently what is your take on abbott india? its my substantial holding. invested at higher levels…Then it went down a lot after the news of Mankind Pharma substitute product and also price control…But in last 6 months and currently in last 2 months, its marching upwards showing the sign of robustness even after above 2 challenges…I wanted to sell it when it went down almost 30% from my buying price, as conviction got challeneged…but I held on…and now it has come to near my buying price. I want to hold on this for next decade…pls advise

Hi Mudit

I like the longevity of business but the risk profile has not changed for last many years in my opinion. Example - Vulnerability to the risk of price control and attack on mother brand is same as what it was let’s say 10 years ago in my opinion. That is what is making me bullish and bearish at the same time :slightly_smiling_face:. I am going very slow with increasing allocation

In my opinion Ajanta pharma’s business risk profile is far more improved in last 10 years as explained here. Although Pledging has increased which I am mindful of