This idea may not be orginal, however I do not recall coming across it in my recent memory. Thus in case its already introduced here, I am happy to pullout this topic.
I started thinking seriously about a portfolio strategy as I reviewed various porfolios shared on this forum & in several investing books and first hand experience from over10yrs of active investing. The central portfolio ideas I found worth noting were,
- Companies with high ROE & Growth rate do well in the long run (provided they generate enough cash to fund their future gowrth through reserves)
- A strong brand (or Moat) will attract high price and it can sustain it over very long term - thus focus on value & growth potential than PE
- Be aware of future themes and opportunities and identify companies that are best placed to take advantage of it.
- Always allocate some fund to small but fast growing companies with big runway.
- There are more opportunites to find winners in bear market and much more opportunties to end up with losers in bull market
- Diversify your portfolio but do not spread thin
- Focus more on avoiding lossers than trying to accumulate winners
- Watchout for special situations when big brands fall and are available at discount
- Known your style of investing and the return you are expecting - build you porfolio around it (learnt through experience)
I found some of the above principles at work in a football club too as I interacted with my colleauges who are obsessed with football. For e.g.
- Football is a game where overall strength of the team matters more than individuals - you may win matches with great players but tournaments are won with great teams. (Investing Principle 7)
- Football clubs have limited funding, linked to their fans base and brand value. Thus they ensure they continues to do well and inline with their club´s style of play by selecting players that match these expectations. (Investing Principle 9)
- They invest in players when they are very young , which ensure they have steady supply of players. (Investing Principle 4)
- Team strategy takes into consideration the external factors like strength and weakness of competitors to maximize outcome (Investing Principle 5)
- They dont shy from buying big names that compliments their future strategy and immediate requirements - provided they are confident of the players role in the team, their fitness level and fund availability (Investing Principle 9)
Below is my thought process for applying football strategy to investing.
Start with the end goal in mind : I want to construct a portfolio which will generate at least 15% return CAGR over 10 years, while limiting the downside in bad period. My investing style is being agressive only when I am very confident, not taking risk beyond my ability to absorb the downside and happy to wait patiently for returns.
Define the rules of play: There three parts to my porfolio,
Playing 11: 11 stocks based on defined profile factoring expected return and risk. This part of porfolio will have highest fund allocation. However new fund inflow will be decided based on market conditions and available opportunities. Near zero maintenace requried here. Changes will be done only incase there is a substantial divergence from the investment thesis or a substitute found to be more suited. The profiles wil be,
:Junior 20: Future pipeline of 20 stocks split equally into two categories,
- High growth potential
- Future leaders
More number of stocks here as we do not know for sure which ones will be the best in the future. Regular pruning requried to ensure only the best are carried forward. Additional bets placed by allocating higher portion of fund inflow.
Substitute: 8-10 stocks to be tracked for possible replacement to playing 11.
- Stars @ value (8): Long term accumulation of big brands at reasonable value
- Special Situation (2): Opportunity in temporary crisis at stock level
- Stocks can switch based on my conviction for. e.g. a Junior stock can be promoted to playing 11
Disclaimer: This concept is still work in progress and thus academic in nature. I am working on the funding allocaiton logic during various market cycles, preparing list of stocks for all the above mentioned profiles and also listing out other guiding principles. I will share the same as soon as its ready. I have not started using it and do not comitt to using it incase I find a better model.
I would appreciate VP members feedback and recommendation.