Portfolio creation in 2019 -Bear (bleeding ) Market

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Hi,

I have been a regular reader of VC posts by some of very intelligent investors. Was waiting for the pessimistic times to rebulid my portfolio ( had few share earlier but exited after 2019 budget)
Here are my picks ( taking a basket approach in different sectors) where I plan to SIP for next one year (ye I believe that this market condition would last at least for next 3 months & after that it would stabilize for sometime )

A Real Estate
i) Purva ii) Kolte Patil iii) Oberoi iv) Ashiana

B Pharma
i) Solara ii) Poly Medicure iii) Divis

C Consumption
i) Godrej Consumer ii) Titan iii) Bajaj Consumer iv) Cera

D Financials
i) Muthoot Fin ii) Manapuram iii) Muthoot Cap iv) Gruh

E Banking
i) DCB ii) Federal iii) RBL

F ) INSURANCE
i) HDFC Life ii) ICICI Lobmbard

G ) Auto
i) Varroc , ii) Harita iii) Sundram Fastners

H) IT
i) Sonata ii) Tata Elexsi iii) MPhasis

I) Others
i) Deepak Nitrite ii) AIA Engineering iii) KNR Construction iv) Mah Logistics v) ICICI Securites vi) Avanti

These are 9 buckets - Intention is to put 15% each in C & I buckets and 10% each in rest of the 7 sectors.

My experience as well as inputs from others intelligent investors tells that in tough times, our portifolio should not be concentrated. The intention is not to make or claim >20% returns. My expectaions are just to make 15% return/annum over a horizon of 5 years.No dreams of having any multi-baggers. Capital preservation is fundamental in my approach.

Look forward to your views ,suggestions or please point out corporate governance issue in any of these companies.

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You have a good stock list, but I will disagree on not filtering it further to build a concentrated portfolio. It becomes very difficult to generate alpha on a widely diversified stock selection. It is impossible for a single person to track these many business. That loss of attention eventually leads to less than superior returns on many investments, and your overall performance then approximates that of index. There is no point in putting so much effort just to get index returns. So you might be better off by investing into well chosen index fund. (You may check the newly introduced index funds by motilal)

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I agree with @Divyanshu_Bagga on portfolio concentration and tracking part . if you arent confident on the selection, index fund is the better way to go about it .
Atleast 50 percent of the portfolio IMHO should consist of secular compounders .
Only invest in cyclical stocks if you have the hang on the cycle .
In cyclical sectors like auto , one doesn’t know when the recovery happens . So its generally considered better to invest on seeing " first green shoots " of recovery as then probability of downside would be limited else one doesnt know till how much it will fall . Peter Lynch has beautifully explained it in his book in the chapter on cyclical stocks . Do read that in case you haven’t.
Do check below link


Sometimes investing at cheap low pe stocks might be costlier as I have found out from my personal experience
I would recommend to read "one up on wall street "
I believe compounders generally have a higher probability of proven growth track record as compared to multibaggers. This is my humble view .
You may try to include compounders like Asian paints, Pidilite in your portfolio
Also Marico is a better company than Bajaj consumer . Just see how cash rich it is , the categories they are expanding in and the geographical expansion and consistent compounding track record .
Financials and banking - Any reason why you didn’t consider HDFC bank and Bajaj Finance. Both have decent execution history especially HDFC bank .
You may gradually try to bring down portfolio stocks to 12 depending on your conviction levels , however if not comfortable, I believe index fund may be better.

Disclosure- I too am an amateur investor and not a sebi registered analyst. Pls do your own diligence before investing. I am invested in some of the names stated above

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It is a little difficult to say beforehand whether an investment strategy will generate Alpha.

With the aim of beating an Index, if a strategy is taking on more risk, then its unwise. A Small and Mid Cap with reasonably good selection of stocks will mostly beat Nifty50 Index in bull markets, but perform just as badly in bear markets. Risk Reward ratio is compromised. Stability is sacrificed for namesake. A concentrated PF runs that risk.

Most of us here are not experts with numbers, and we invest in companies that are barely within our circle of competence. As minority investors, we are probably the last ones to know of important proceedings. Therefore, a diversified PF is not such a bad idea, where the risk in each stock is a max 3%.

In such a diversified PF, one could perform a rotation of stocks. The expensive ones, that have given the target profits and seem overvalued could be sold, and the amount diverted to ones available at cheap. This could be tuned to ones level of expertise; for ex:

  1. perennial growth stocks like Nestle, Asian Paints, hdfc bank etc once bought at good valuations should never be sold

  2. Some even sub-par stocks, not buy and hold stories, like Force Motors, Ongc, SBI become attractive buys at a certain level.

The degree of success of a PF depends on Exits.

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The question wasn’t about midcap vs largecap, but about diversified vs concentrated. If an individual investor has highly diversified midcap portfolio, then he is better off with an midcap index fund.

We do have midcap150 and smallcap250 index funds now, besides nifty50 and nifty500. I believe @ashishverma wants to invest in midcaps and smallcaps, based on the stock selection, hence suggested to check these new index funds by Motilal.

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The reason it becomes difficult to outperform nifty in long term horizons is not because nifty 50 will only have good companies. We have seen and know many cases in which nifty 50 company has gone down to 1/10th its value.

But it hasn’t affected nifty because of allocation.

The top 10 giants are like rocks. That’s what you need in your portfolio. Solid companies.

Think about it, 30 companies in nifty are much weaker than the 20. If equal allocation was done, nifty would have been long gone as a benchmark.

Make your winners bigger to have a solid portfolio that will generate alpha for a long period of time.

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Diversified vs Concentrated Portfolio

“diversification is protection against ignorance. It makes little sense if you know what you are doing.” - Warren Buffet.

A newbie investor isn’t supposed to be having acumen like Buffett or Similar celebrated investors, or is expected to have control over emotion like them, especially in turbulant times like these.

So, I hold the same opinion as you & @jamit05.

Diversification at best can reduce volatility of short-term portfolio returns. So, I too hold a diversified portfolio at this time. Gradually, I plan to gain conviction and reduce the number of stocks to 15-20, or keep most allocation to these number of stocks, preferably at good times.

I am a believer of the Myth of 30 Stock Portfolio. Joel Greenblatt showed in his book ‘The Little Book That Still Beats the Market’ that 30 stocks chosen on the basis of a good algorithm, without further inspection, can comprehensively beat market returns over longer term. Yes, there will be some duds, some corrupts, but the returns of the good ones will be enough to overcome those setbacks.

P.S. Greenblatt’s method told to churn portfolio every year based on the algorithm. But since I am not choosing stocks blindly, but based on basic research, I do not need to churn much often.

There have been numerous legendary investors who maintained diversified portfolio and attained market-beating returns. But I agree that it is difficult mainly because of continued tracking of large number of stocks.

However, not all kind of stocks require continued monitoring. Stocks like HDFC Bank, Pidilite, Asian Paints, Nestle, Marico, Bajaj Fin etc. can be kept with minimal monitoring. Just having a cursory look at quarterly results is enough for these sturdy players.

There can be shocks but these are in my opinion antifragile companies which have historically became better with every perturbation.

However, black swan incidents can happen in future, and so there are tools like Zerodha Sentinel which can alert you on abnormal price fall, and make you ready to decide the course of action, if any.

This is a sensible suggestion, but that doesn’t give the pleasure of having company ownership, being a part of companies endeavor, excitement of discovering gems at reasonable valuation etc. :slight_smile: Not sure, if this is the rationale of the OP @ashishverma too.

Sorry, for expressing personal opinion, as this is not my portfolio thread. Not sure if the OP agrees with me. One may not follow conventional wisdom if he has sound logic for not following it.

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Very reasonable expectation. Just keep the horizon longer, minimum 10 years.

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Instead of holding a fund, I would prefer to run my own fund and manage my own money. The modus operandi, to get better returns than the funds, is to do things that the funds cannot do.

Funds focus of getting annual performance, and make big banners about it. We, the retail investors, don’t have any such compulsions. Therefore, we could focus only on buying good businesses, which may or may not take off within the fiscal year. We keep holding the stock as long as the numbers are in line and EPS adding up. It is inevitable that the share price will reflect the good health in the next bull run.

This approach is most suited for small and mid caps. However, buying with a conservative mindset (with plenty of MoS) and holding beyond 2+ years without a wavering mind is a primary requirement.

Cheers.

PS: I like how you are maintaining your PF.

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That is a good attitude to have. If you are doing things that funds can easily do, you are unlikely to find an investment edge.

Diversification comes easy to fund managers. More diversified a portfolio, more is its similarity with overall market performance. So fund managers do not have to worry about justifying periods of bad performance, as they will coincide with the bad period for overall market.

That said, concentration is hard, but that alone does not guarantee an edge. You have to be a good stock picker, and you cannot afford to make mistakes of judging business quality in a concentrated portfolio.

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What about selecting the best among mid-cap and small-cap if you have certain conviction. Index funds are for the people who don;t understand companies and stocks.

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Sure. That is a good idea. But having some knowledge about some stocks can be dangerous. It can give a false sense of security as we tend to underestimate unknown. It takes significant effort to develop in depth knowledge of underlying business. If you can do that for these many stocks and stay on top of any recent developments in their business, great!

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Having a concentrated PF in MidCap will require a very advanced understanding of the business and the industry, because there are many unknowns. A very high levels of conviction will be required for you to hold onto even in times of carnage.

Concentrated PF route is best taken with Large Caps, where there is a certain amount of certainty, which is absent in lesser caps.

With MidCaps, I would go for a diversified PF. And hence even if I do not have a deep understanding of the industry and the stock it would be okay. Sure, I would follow the quarterlies. I would take solace in the fact that I have in my PF, Growth stocks, reliable history of the management, and purchased at cheap to reasonable PE.

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May be you’re under-estimating my knowledge::grinning:.
Would request you to please point out the companies from my list which you feel are not good or have certain issues.

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@ashishverma what about having a NBFC in place one of your bank, preferably RBL. Chola, Bajaj, Mas Financial may be good candidates.

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ICICI Lombard: I am skeptical of the ICICI culture. Consider the following news item

ICICI securities: isn’t the business losing value to discount brokers like zerodha?

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MAS financial is my shortlist. Thanks for sharing.

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I was skeptical too till the times of Chanda Kochar. But now hoping that new management would be different.

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Okay but evaluate ICICI Securities more. According to the analyst reports its customer base is stagnant, so for other full time brokers’.

I guess you need to keep one of them. Gold loan companies are cyclical and are currently having a good time.

Evaluate it more. Great business but promoters are pledging shares of this cash flow engine to revive their junk businesses.

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Thanks . Food for thoughts in ICICI sec, would revisit my assumptions.

Muthoot Fin & Manna- 2 reasons for keeping both- i) highly bullish on gold, these 2 are my proxy bets on the same ii) Manna is slowly expanding beyond gold loans , hence trying to balance the risk & oportunities

Bajaj Consumer : You have a valid point.Would study more