Sahil's Portfolio

[sahil_vi]

Hi everyone,

While I joined this forum only in December 2019, I have been an avid reader since a year now. I will talk in different sections about various parts which have shaped my journey as an investor to make this thread structured.

Brief history on my evolution as an investor
Started out investing in Mutual funds. Realized that the structure makes it susceptible to being exposed to the worst of investing biases and the incentives also do not align with the investor. Read a bit about investing. The intelligent investor was my first book. I would not add each and every book here but suffice to say, I was extremely inspired by the success of Warren Buffett and many others like him. Wanted to at least emulate a fraction of their investing success. Started out building my own tools which are equivalent of screener. I wrote some scripts to download company info from the website moneyworks4me. Used a simple projection of past eps growth into the future. Calculated the discount to current value. Invested on that basis. Did not understand the concept of quality of earnings. Concept of owner’s earnings. Concept of cash flows. Concept of “just because it grew X% in the past it does not mean it would continue to do so in the future”. Discovered ValuePickr. To begin with, only followed company specific threads. Even those were very very useful. The amount of, the extent of, the breadth of knowledge and forensic research people had done was inspiring. It inspired me to do the same. I read through and read about valuepickr. Read through all of the “hall of fame” threads and many outside it as well. Slowly understood all the concepts i outlined above. Also learned about wonderful books that I am still reading and learning from. Still learning a lot.
The graph of my understanding and knowledge (including the knowledge about my own lack of skills and knowledge) has really looked like some of these stocks that VP finds and invests in:

Current Investment Process
I generally seek to create good screeners which capture certain “types” of companies and then utilize all tools available to me (Annual Reports, VP threads, AGMs, ConCalls, Conversations with the management) in order to build conviction about investing.
I generally use two types of screeners these days:

1. Consistent growers
2. Turn-around stories.

I’ve realized that generally speaking, category one is priced well (there are bound to be exceptions). A large fraction of outsized profits and returns are made by finding turn-around stories. These could be company turn-arounds, sector turn-arounds (great thread on cyclical investing: Cyclical investing - case studies) or even country turnarounds. An example screen is here: https://www.screener.in/screens/245381/Sahils-smallcap-ST-or-MT-turnaround-stories. One of the custom screeners I have implemented in google sheets is to combine different valuation techniques to find under-valued companies (rule#1 investing, DCF, Magic Formula). I then go about studying all the 60 or 100 companies which show up, little by little. Starting from their Screener.in pages and going up to their VP threads and Annual reports where necessary.
Note: Not all companies I pick follow this nice process. Certain companies absolutely do not show up on any screeners because the turn-around parameters are not there on screener. I still invest in them when i can build the conviction from following the rest of the process.

Position Sizing
I have also come to realize that outsized returns are made by outsized portfolio allocations. If we simply assign each pick an equal amount of capital, the returns would definitely be good if we pick good stocks, but they won’t be as good as if the portfolio is skewed towards certain companies.

1. I also use portfolio sizing to indicate my uncertainty/level of understanding about a business/company.
2. Position sizing also depends on the size of opportunity (as i see it)
3. the level of under-valuation (industry + company (both) is great, only one of them is good, none of them is bad).
4. Sometimes it is a forced function for me. For example, if you see my MF below, my largest position is something i cannot control (that was the minimum quantity I could have bought). As we can see, i’m more comfortable being fluid about position sizing than I am about missing on a goof opportunity.

I also do realize that I do not have any proven track record of investing. For this reason, i only self-manage about 25% of my net worth. The rest is secure into Equity Mutual funds (which i dislike but the good ones generally do not blow up), Liquid Funds and Savings account. Over the next 5-10 years, I would like to grow the 25% up to about 50% where I would leave it until i have at least a 20 years investment record. if i am satisfied with my processes and returns, I would look to move most of my net worth into self-management. But this is a multi-decade process. I would not judge my investment prowess based on 1-year, 2-year or K-month returns. I’m ok with losing the up side because despite what might appear from my stock picks, I’m actually quite a conservative investor (now).

Current Portfolio

Instrument	Avg. cost	LTP	Net chg.	Percent (Cost basis)	Percent (LTP basis)
CHEMCRUX	181.5	226.6	24.85	0.2619843099	0.2611003739
CAPLIPOINT	302.09	585.55	93.84	0.08393937594	0.1298800082
IDFCFIRSTB	23.57	28.45	20.71	0.1343864034	0.1294872342
KEI	302.72	377.1	24.57	0.07712309992	0.07669178221
RACLGEAR	75.98	74.1	-2.48	0.07271290079	0.05660819726
LINCOLN	169.96	213	25.32	0.04661213294	0.04663165106
BAJFINANCE	2572.74	3466	34.72	0.04084954626	0.04393077164
POLYMED	330.54	407.8	23.37	0.04055473814	0.03994052189
GOLDBEES	43.92	49.17	11.95	0.03962242042	0.03541015386
SIRCA	198.27	230.75	16.38	0.03720480322	0.03456468873
RAIN	85.71	100.1	16.79	0.03606356926	0.03362174305
GAEL	175.78	183.9	4.62	0.0380591752	0.03178488002
NCC	25.03	30.85	23.27	0.03034860888	0.02985946641
LTTS	1461.57	1594	9.06	0.02953563476	0.02571366259
KPRMILL	456	458.55	0.56	0.01645521285	0.01320913244
SHBCLQ	36.65	36.5	-0.4	0.01454806812	0.01156573258

In this post, I will not talk a lot about individual companies. Happy to discuss in short about specific companies if anyone wants to. IMO more detailed discussions should happen on the specific thread so that everyone can benefit from them :-). For some of the large holdings, one would be able to find my thoughts on the specific company threads. For others, I did not add anything because i did not have anything to add. The forum threads covers the investment thesis beautifully.

Portfolio Goals
Invest in companies with a combination of earnings/sales/cash flow growth and valuation expansion leading to outsized returns. My expectations for the portfolio is to return at least 25% per annum over a long duration (10 years). From my observations, good mutual funds already provide 15-18% over long durations and hence I would discontinue direct stock picking if I think that I cannot achieve a sufficient return over and above mutual funds.

Why I am creating this thread
In order to:

1. Seek feedback about every aspect of my processes. Without a healthy dose of criticism, we cannot improve.
2. As a public record of my decisions (also doubling up as some sort of an investment journal).
3. Give back to this vibrant community (and also myself) by having in-depth discussions with anyone that wants to have one specifically about my decisions (which would enable me to learn more about myself and my processes).

Disclaimer: please do not think of any of this as investment advice. All of these are my personal opinions and I could very well be wrong about any of them. Please consult your financial advisors before investing in anything.

[sahil_vi]

Posting this as a separate post since this is somewhat unrelated to the overall portfolio. I am also thinking a lot about tail risks these days. Although I have not had the good fortune of reading Nassim taleb’s books yet, I follow this YouTube channel called The swedish investor which makes great 15 minutes summaries for all books investing. Ive seen all the videos about Talen’s books. In addition one of my friend’s (who isn’t on this forum) is an avid taleb reader. I discuss Taleb and his ideas in depth with him.

Equity presents a risky proposition to us as investors because the risk of the entire equity market blowing up is something that is real (though likely not quantifiable).

Here is a chart of DJIA over last 100 years (more than that actually). Historical data is inflation-adjusted using the headline CPI and each data point represents the month-end closing value.

Between 1929 and 1990 the DJIA moved nowhere (modulo inflation). That’s 60 years of 0 returns. Im sure productivity and real profits grew in those 60 years. I know i am picking very biased start and end points, but I hope that the point is coming across: the risk of notional losses for decades in equity is real and non-zero because the stock market can be quite irrational for long durations of time. So the question becomes, how do you protect against this risk? How do we protect against risk of bad health, or the loss of life? Insurance. The equivalent in equity are derivatives. Options allow us to hedge against our positions. If i have X lakhs in equity, I could buy options that would become X/10 lakhs in case the stock market crashes. Options are not just for trading and speculation. The primary motive is to hedge the equity risk. By sacrificing 1% of my portfolio returns, i can protect against the downside roughly to an extent of 10%. But generally large down-cycles only happen once in 10 years, so it all evens out. You pay 1% PA for 10 years to protect against the risk. If and when the risk materializes, you make back 10%. Options essentially make the equity cycle a little less volatile. Of course, options being traded in free markets means that even the risk premium could potentially be overpriced or underpriced. To be more specific, I buy put options (Good zerodha course on basics: The Put Option Buying – Varsity by Zerodha) to hedge against the tail risk of stock markets crashing. Due to a larger expectation of a crash, the risk premiums are high right now. It is hard to know whether im overpaying or underpaying, but the only way I’ve found to learn more about anything is to have Skin in the game.

[Harsh04]

the use of options buying as hedge against equity portfolio was discussed in some other thread…
here are some practical difficulties that one might experience while buying far dated options :

1. I have seen that one can only trade options upto 3 months away. even the ones that is the most far dated (3rd month) is mostly illiquid and price discovery of the option is a issue.
2. buying a option will make you loose on time decay if the markets dont fall.
   If the markets move up, you will make money in your portfolio…but what if markets move sideways ? u wont make money on portfolio and u wont even make money on ur options.
   one can make money positively only when the rate of fall is greater than the time decay.
   IV too affects the options pricing…

i would be quite interested to know if you or someone has practically employed far dated options buying to hedge against portfolio and know how good the hedge is in a crash.

[sahil_vi]

@Harsh04

buying a option will make you loose on time decay if the markets dont fall.
If the markets move up, you will make money in your portfolio…but what if markets move sideways ? u wont make money on portfolio and u wont even make money on ur options.

Thanks for sharing your opinion. I find it very valuable. However, in my limited knowledge/experience, this is not the right way to think about insurance. The idea of insurance is to insure against the tail risks. It is not to “make money”. The extent of insurance provided is a function of the market forces as well as the extent of our exposure to risk and our willingness to protect against it. I’m ok sacrificing 1% of my profits every year so I can protect myself up to 10% loss if the market falls. If it doesn’t fall, I don’t care about it because this is how insurance works.
If we pay 20k inr for medical insurance would we feel bad that the money got wasted and that we didn’t get any disease or would we feel happy that we did not need to use the medical insurance? I hope it is the latter. This is how I feel about options. Of course, not buying any put options is also a position one is taking. One of having a completely unhedged equity position. Everything is reasonable, it depends on one’s risk tolerance and willingness to guard against that risk.

The 3 month far options are not that illiquid. I will be happy to share how much protection it can provide if a fall does occur .

For this calculation let us assume portfolio size is 10 lakhs in equity. I did some rough calculations. 1 lot of put option for strike price of 9500 October expiry was 61 rupees. Roughly Rs 4500 premium.

1. If market falls to 8000 by October, the worth of the option would be (1500-60)*75 = 1.08 lakhs rupees. For a 28% fall in portfolio value (assuming beta of 1) we get back 11% out of the loss (effective loss is 17%).
2. If the market falls to 9000 by October, the worth of the option would be 33000. The fall in portfolio is 18% and the cushion provided is only 3% (effective loss is 15%).

In this way we can create a table of risk/reward payoff for varying scenarios and determine the extent of risk we want to protect again and the amount of reward we’re getting in return.

One thing I would like to reiterate is that we should not think of options as a concept as being net positive or negative for the portfolio (apart from the problem of overpaying which hurts us even in equity investing) . They simply serve to smooth the portfolio returns. Whether it is worth paying the premium (is the premium high or low) is an individual valuation analysis one has to do just like we do for equity. Derivative pricing is much more nuanced imo as you rightly pointed out. I would consider myself a learner and not an expert. I hope to learn more and come up with better decisions in the future.

[iivans]

Hi Sahil, for me insurance is to safe guard against an eventuality that may put my financials at risk. The decision to insure would be based on my assessment of the probability and severity of the risk. When we look at it from the equity point of view, my thought process would be something like this,

• What % of my wealth is in equity?
• How dependent I am on the income it generates or how soon I would need it?
• What the probability of the negative outcome?
• What is the risk?
• What is the impact of the negative outcome on my financials?
• Possibility of recovery?

Lets take examples now:
Scenario A
Equity Exposure: 25%
Dependency: not until next 20 years
Probability: A 30%+ fall occurs around every 7 years (on average)
Impact: 7.5% fall in net worth
Recovery possibility: Given we have 20%, there is high possibility I may recover the loss. Even if the market remains stagnant the impact would not be severe.

Scenario B
Equity Exposure: 75%
Dependency: need in next 10 years
Probability: A 30%+ fall occurs around every 7 years (on average)
Impact: 22.5% fall in net worth
Recovery possibility: Low possibility assuming there would be another 30% fall closer to my dependency timeframe.

Conclusion:
Scenario A: I don’t insure - rather use the time to focus on asset allocation and stock selection
Scenario B: Insure or rebalance the portfolio (I would prefer rebalance)

I made a lot of assumptions here to keep it simple. Happy to know your point of view.

[sahil_vi]

I completely agree with your reasoning. This is very close to my own reasoning.

Btw do note that the decision to insure or not, and decision to rebalance or not, is not a binary one. One can also do some linear combination of the two.

A 100% equity portfolio can be protected against future downside risk in two ways.

@iivans

1. Insure or
2. rebalance the portfolio

We should think of them as 2 independent axes and feel free to make decisions along either or both of them.

I did trim my equity risk by trimming equity and allocating more to fixed income. But, my remaining exposure of 25% of net worth in equity, how do I protect that?
Also if i consider my 1 year forward net worth, a large fraction of that is in Google Stocks. How do i provide downside protection for that? I cannot sell stocks I do not yet own (the stocks vest every 6 months). The only way I know of, is to buy put options. The reason for creating a hedge is I believe the transition from a fully hedged portfolio to no hedge should be a continuous one, not a discrete/binary one.

For a 100% Equity 0% low risk net worth, maybe I would buy 10 lots of nifty put options.
For a 50% Equity 50% low risk net worth, I’d buy 5 lots of nifty put options.
For a 25% Equity 75% low risk net worth, I’d buy 2 lots of nifty put options. For me, the point at which i go to 0 lots, is not at 25% for sure. Maybe at 10% of net worth in equity I do not need to hedge at all. But a key consideration for me is also the X-years forward net worth which is heavily dependent on Google stock price which I feel the need to hedge against.

@iivans

for me insurance is to safe guard against an eventuality that may put my financials at risk. The decision to insure would be based on my assessment of the probability and severity of the risk

Completely agreed. This depends on the individual’s position and their specific set of asset allocation (current as well as future). I would also like to point out that the real risk to our net worths is from the crazy great depression style events. For 70 years, I’d lose 1% of my gains each year. But in the 70th year if and when there is a turn in the long-term debt cycle and a big deleveraging then my equity portion of net worth could go down by 70-90%. This insurance, is to protect against that. The freakier the incident, the higher the protection.

@sahil_vi

• If market falls to 8000 by October, the worth of the option would be (1500-60)*75 = 1.08 lakhs rupees. For a 28% fall in portfolio value (assuming beta of 1) we get back 11% out of the loss (effective loss is 17%).
• If the market falls to 9000 by October, the worth of the option would be 33000. The fall in portfolio is 18% and the cushion provided is only 3% (effective loss is 15%).

Continuing from my previous post:
3. If the NIFTY falls to 5000, worth of the option is 3,30,000 (33% protection) for a portfolio fall of 55%. Effective fall is 22%. As we can see the cushion size is larger the freakier the fall is. This is the protection I’m buying. I’d feel like a fool 9/10 years. But that one time that market does fall 50-60%, my downside would be quite limited. Please do note that the option needs to held to maturity in this case for desired downside protection. We’re not looking to trade in and out of the options. The lower the market falls, the larger the cushion is.

[iivans]

@sahil_vi

Btw do note that the decision to insure or not, and decision to rebalance or not, is not a binary one. One can also do some linear combination of the two.

Agree, as with all risks we first try to do what we can to reduce the impact and then for the part which is outside our control we insure. However as I implied earlier, its preferable to insure when you see it as a grave and imminent risk for e.g. Life insurance. But I would not accord that level of risk to equity as we choose to be in equity and thus we can decide the magnitude of the risk we carry which is not in the case of life. In my case, I have rebalanced my portfolio to eliminate the need for insurance based on my risk taking capacity and my assessment of market conditions.

@sahil_vi

Also if i consider my 1 year forward net worth, a large fraction of that is in Google Stocks.

Now this a stock specific risk which requires a stock specific risk mitigation - as the stock may sometimes move opposite to the market. I too carry such risk on my portfolio as my ESOP investments are locked-in and it forms 50% of my current equity investment. However I see currency as a decent hedge here. My company is based in Europe and based on experience EUR has always appreciated over time vs INR. I consider it as a decent hedge for my risk tolerance. I know there is a lot going on in Europe and my risk can be substantially higher but in my case, I can decide to opt for ESOP and thus can manage my risk (rebalance). In case you do not have such option I agree is a risk outside your control and worth insuring - however de-risking it by hedging in Indian market may not have the same effect as you are expecting.

@sahil_vi

I would also like to point out that the real risk to our net worths is from the crazy great depression style events. For 70 years, I’d lose 1% of my gains each year. But in the 70th year if and when there is a turn in the long-term debt cycle and a big deleveraging then my equity portion of net worth could go down by 70-90%. This insurance, is to protect against that. The freakier the incident, the higher the protection.

For me its all about rebalancing the portfolio vs the timeline by when I would need the funds. As with hedging, I fear in such situation, the person/company on the other side of the hedge may go bankrupt.

@sahil_vi

Please do note that the option needs to held to maturity in this case for desired downside protection. We’re not looking to trade in and out of the options. The lower the market falls, the larger the cushion is.

Noted, for me Insurance is to be held as long as the risk exists.

I find hedging has following challenges which doesn’t make it equivalent to usual insurance,

• Pricing: There’s no way to judge if what I am paying is reasonable
• Risk coverage: it doesn’t allow for a full risk cover as the cost to benefit ratio becomes prohibitively higher
• Time: vs common insurance products it requires more time and effort to get it right

However this my personal opinion and It may not be the same for you

[sahil_vi]

@iivans

and my assessment of market conditions

The hedging is also to hedge against the risk of wrong market timing. Put in different words, I am actually increasing my equity allocation every month because I do not know what will happen to the equity market overall. I do realize that the risk of a fall is real. However, with all the central bank actions, the mother market (US market) has found a bottom. So, there is also a high chance that the market will not fall any further. Instead of relying on my judgement of the probability of a fall completely, I prefer buying the options which, as I have demonstrated, depending on the severity of the fall, do provide quite an adequate cover. If a 55% fall in equity is converted to a 22% fall only, I would call that a major win. The additional 33% of our equity net worth which I receive as cash can then be reemployed as we see fit.

@iivans

However I see currency as a decent hedge here

Thanks for sharing your option, but i think we should be careful in making such statements. I do not know much about the Euro, but at least for the dollar, there is a very real possibility of a weak dollar due to the massive QE done by the fed and the massive liquidity injection into the system. Also, do note that what I’m trying to protect here is the equity risk as well, because in my case, I don’t get ESOPs, they are a pre-decided number of stocks I get every K months (no element of optionality).

@iivans

as the stock may sometimes move opposite to the market

The kind of freak events I’m trying to protect against, people sell everything. Also, in general, google is very linked to the state of the economy, being the largest digital ads company in the world. While your advice is sound in general, it just does not apply to Google . (In fact it was the only large tech company which reported a Fall in Revenue in Q2).

@iivans

however de-risking it by hedging in Indian market may not have the same effect as you are expecting

Thanks for the warning! Do you have any data to back this up? AFAIK, all 50%+ falls in US stock markets are accompanied by similar falls in Indian stock markets simply due to the fact that FDIs and FPIs own a majority of our large-cap stocks. When they exit en-masse at any price, it triggers a panic cycle which causes our own markets to crash (due to the contagion of the fear). Please do correct me if I’m wrong. As per my understanding (Trading Derivatives in USA from India - #3 by namitjain2890 - F&O - Trading Q&A by Zerodha - All your queries on trading and markets answered) we are legally not allowed to trade in US F&O. I do not see any other way of hedging my Google stock future exposure. I understand that this is imperfect. But due to the correlations between NIFTY and S&P and S&P and GOOG, i find it to be the least worst ways of hedging my exposure. Happy to hear about any alternatives I could use which you find better!

@iivans

As with hedging, I fear in such situation, the person/company on the other side of the hedge may go bankrupt

Are you saying that, the option seller would be unable to honor the options contract? I thought SEBI and NSE would have enough checks and balances to make sure this does not happen.

@iivans

Pricing: There’s no way to judge if what I am paying is reasonable

I would be very careful making impossibility statements. Aside from mathematics, they’re almost always wrong. There is a very rich set of literature on option pricing, that one can consume to educate ourselves better.

I am no expert on option pricing. But I did some analysis to formalize my earlier arguments as below:

Nifty Level	Portfolio Loss (PL)	PL %	Insurance Provided (IP)	IP %	Effective Portfolio Loss (EPL %)	IP/PL (Percent of Loss which is insured)
9000	196428.5714	0.1964285714	32850	0.03285	0.1635785714	0.1672363636
8500	241071.4286	0.2410714286	70350	0.07035	0.1707214286	0.2918222222
8000	285714.2857	0.2857142857	107850	0.10785	0.1778642857	0.377475
7500	330357.1429	0.3303571429	145350	0.14535	0.1850071429	0.4399783784
7000	375000	0.375	182850	0.18285	0.19215	0.4876
6500	419642.8571	0.4196428571	220350	0.22035	0.1992928571	0.5250893617
6000	464285.7143	0.4642857143	257850	0.25785	0.2064357143	0.5553692308
5500	508928.5714	0.5089285714	295350	0.29535	0.2135785714	0.5803368421
5000	553571.4286	0.5535714286	332850	0.33285	0.2207214286	0.6012774194
4500	598214.2857	0.5982142857	370350	0.37035	0.2278642857	0.6190925373
2000	821428.5714	0.8214285714	557850	0.55785	0.2635785714	0.6791217391

Portfolio Size	1000000	Cost of option	62	Cost paid in Insurance	0.00465
Current Nifty Level	11200	Strike Price	9500

As we can see, the insurance provided (% of loss covered) increases, the larger the loss is. This means that effective loss % grows sub-linearly with the loss. This makes options very desirable for protecting against freak events. I also played around with the cost of the option. it does not matter a lot if we pay 60 versus 40 or 80 rupees. Because the payout is effectively (Strike price - CMP at end of option Expiry - cost)*75.

One can actually do a similar analysis for all different strike prices and option prices to arrive at desired level of protection and also get a sense for what we are paying for that protection.

@iivans

Risk coverage: it doesn’t allow for a full risk cover as the cost to benefit ratio becomes prohibitively higher

Thanks for sharing your opinion, but I don’t think I understand this. Just because it does not provide full risk coverage, it does not mean that cost to benefit ratio is prohibitively large.

@iivans

Time: vs common insurance products it requires more time and effort to get it right

Most definitely. But hey, if im spending all those hundreds of hours picking stocks on ValuePickr, whats a few dozen additional hours trying to hedge my equity risk

@iivans

However this my personal opinion and It may not be the same for you

To each their own.

[iivans]

This conversation will have no end I think it would be best to learn through experience. Thus please do share your progress on a regular basis so that everyone benefits form it. Good luck!

P.S. I stand by my statements and happy to share evidence of how I arrived at those conclusions, if necessary.

[maheshkumar]

@sahil_vi

1 lot of put option for strike price of 9500 October expiry was 61 rupees. Roughly Rs 4500 premium

So by this way 4500 x 12 months = 54 thousand rs
It means 5.4 % portfolio loss
Am I missing something

[sahil_vi]

@maheshkumar

Am I missing something

Yes. The 3-month away option already provides protection for 3 months. So we only buy this option 4 times a year. This implies a premium paid of 1.8% over the year. One key thing worth observing is that options are priced in proportion to VIX (volatility index). Here is a look at India VIX in last 1 year:

VIX right now is still above 20, and kind of 100% more than typical bull market times. This also means that the option prices / premiums are up roughly 100% because the probability of a fall is also up 100%. Essentially the premiums are dynamic and determined by current market conditions. Right now it is 1.8% PA, for a similar level of protection, premiums might be 50% higher if nifty were below 9000. If we were in a secular bull market, I would expect this premium to be <1%.

BTW the kind of put options we buy to hedge, is itself a choice to be made. One can buy weekly expiry options, monthly expiry options, 3 month away expiry options and so forth.

[sameernics]

Hi Sahil,

Except a comment on your current portfolio, I wont get into other aspects of your post.
The only concern at the minute is your portfolio, that it is very much concentrated with small/mid and micro caps. It may be good idea to bring in few quality large cap names for stability and to dilute the overall risk. Also think about bringing down the number of stocks to around 10-12, that would ease you in tracking them regularly.

Disclosure: Except Chemcrux and Sirca, I do not hold any of other stocks mentioned by you.

[sahil_vi]

Hi sameer, thanks for the feedback. I appreciate it a lot.

Apologies, when I first posted I had not talked about my goals at all. I have now clarified in first post itself, that the goal of this portfolio is capital growth by 25%+ and I’d happily invest in any company which provides me that level of growth. Towards that end, I had invested in Bajaj finance and idfc first bank (which was a large cap when I’d started investing in it back in December last year).

I completely agree with your advice on smaller number of companies. Towards this end, I would like to point out that 50% of the portfolio on cmp basis is in 3 stocks, 75% in top 7 stocks. The lower allocation stocks are more for exploration and a forcing function for me to study them better and build conviction to invest more. At any point I intend to maintain a similar concentration in the portfolio as outlined above. If I increase allocation to sirca to say 12% of pf (as an example) then one of the top K stocks has to get a lower allocation so as to maintain the concentration.

[sameernics]

No issues at all !!! All i am saying, you need to be extra careful in your selection of basket for small/mid/micro caps. You need to be absolutely spot on with the Co’s fundamentals, management quality, Corp governance, Niche sector etc. Things do change dramatically for these caps when markets are not kind. All the best.

[Inimitable_Investor]

Hey Sahil,

Good investment thesis. I wanted to know about two aspects regarding exit criteria.

1. Do you have a written Exit criteria for individual stocks/ portfolio?
2. How are you planning to book profits in the future? Given that you aim for a 25% returns from your portfolio, I think aside from choosing the right scrips, exit also play a crucial role in capital preservation in the long run. TIA

[sahil_vi]

Hi,

@Inimitable_Investor

Do you have a written Exit criteria for individual stocks/ portfolio?

1. Most of these small companies have a key person risk. If the key person is unable to perform the job and i do not have equal amount of trust in the replacing key person, I would exit because trust in management is paramount, especially for the these micro/small caps.
2. valuation is subjective. If i feel any of the companies is severely over-valued then I would exit it. Resources uses: historic valuations, peer valuations. This is because valuation is cyclical, even for secular growth stories. Example: for HDFC bank:
   
   
3. This is the hardest one to execute in practice. I would evaluate narrative for the company and also the industry and company tailwinds/headwinds and how long they’re likely to last. it does not make sense to invest in cyclicals at the peak of the cycle. Companies like Rain Industries and RACL (auto maker) it makes sense to invest only towards the trough of the cycle. Fall in growth in fundamentals of a company have to evaluated for whether they are a short-term headwind or a change in the narrative for the company. Things like management quality become important here. Honest managements will pain a honest picture of company or industry headwinds.

@Inimitable_Investor

How are you planning to book profits in the future? Given that you aim for a 25% returns from your portfolio, I think aside from choosing the right scrips, exit also play a crucial role in capital preservation in the long run.

If my investment thesis in the company is not perturbed. If I believe that fundamentals are growing at a healthy pace and either the rerating has happened or will happen in next 5 years then I would continue to hold through ups and downs. One of the portfolio stock caplin point was giving 100% gains at one point. Now its down to 67% portfolio gains. These kind of wild swings are not uncommon in such small companies. People ride hope waves. Are the fundamentals trending where I want them to? Yes. Then i continue to hold positions and try to add near local minimas. One interesting thing I’ve realized is that the only way for one to make outsized returns is when one of 2 things happens:

1. A secular Bull market for the small and midcaps.
2. Company or industry specific narratives. Eg: CRAMS, pharma, specialty chemicals.
   So, we need to buy companies when they’re unloved (Rain, RACL, NCC, IDFCF right now) and hold them through their respective industry or market-cap or company specific bull runs.

There will be periods of ups and downs, we need to decide whether this marks the beginning of a muti-year down cycle for the fundamentals, or is this a blip on the roadmap. This is the most important question as far as fundamentals based exit is concerned, imo.

PS: All positions below 4% are experimental for me. I generally take a 2-4% portfolio position in a company to investigate it better (skin in the game). It acts as a forcing function for me to study it in greater depth.

Would also take this chance to announce that I exited LTTS because it does not fit-in with my portfolio criterion on either front:

1. Valuation is near average levels:
   
   
   
   It can go a little bit higher, but that brings me to the second thing:
2. Growth in earnings has been roughly 9% in 4 years, and I feel more uncertain about future growth now than i did earlier. There are no clear triggers either for earnings growth or re-rating imo.

I need to better understand the midcap IT space to figure out if one of them worth my capital.

[greengoblin]

Hi Sahil,

Have you worked on the strong bear case for the Co’s you are holding? You have mentioned about management, keyman risk, cyclicity.

Another question I have is that, how do you know if a Co has become overvalued, in order to exit? Overvaluation can be very sector specific, and one needs to factor headwinds, tailwinds, growth trajectory not following the conviction one had in mind while investing, being in the down cycle and no vision of momentum in earnings for next couple of years. Cyclicity is very difficult to predict (at least for me). ConCalls can point it to some extent. But things can become very uncertain without warnings.

Thirdly, if I may ask, what was your conviction behind Sirca Paints? Going through the ConCalls, I found their mention on little to no pricing power (which is decided by Asian Paints and Pidilite, and followed by Sirca). It questions my understanding of moat.

Wanted to know your thoughts along these lines.

PS: I am still learning. I would be happy to be corrected and enlightenend on topics, where I may be clearly wrong, or have limited understanding.

All the best for your PF.

[sahil_vi]

Hi aashish,

@greengoblin

Have you worked on the strong bear case for the Co’s you are holding? You have mentioned about management, keyman risk, cyclicity.

If by bear case you mean enumerating the downside risks then yes, i do enumerate those for all the companies with significant allocation.

@greengoblin

Overvaluation can be very sector specific, and one needs to factor headwinds, tailwinds, growth trajectory not following the conviction one had in mind while investing, being in the down cycle and no vision of momentum in earnings for next couple of years.

I’ve only been practicing investing for about 2 years and it’s been value investing since the start. For this reason I don’t have many practical insights to share with you only plans. As you rightly pointed out, sectors as a whole can get overvalued. Or there might be stock specific overvaluation. The maxim that I remember from buffet is “be greedy when everyone is fearful and fearful when everyone is greedy”. In practice, I intend to closely track sector and company valuations versus their own historic valuations. Another maxim which comes to mind is “it’s hard to make money in a consensus trade”. In many senses value investing is a trade, it’s a time arbitrage. If a company is growing at 20% and we do not have too much visibility for its earnings, then a p/e of 50 is most certainly overvalued. Overvaluation imo for the majority of companies is a function of 3 things :

1. Earnings growth

2. Certainly of earnings growth (another way to think about this is as a moat)

3. How much of that is factored into the price.

If a company touches it’s historic life time high valuations then that is a clear indication that it needs to be re-evaluated. On a more concrete level, overvaluation is also a subjective decision to be made. For this reason it is good to make decisions in a continuous or time-staggered way. If we got into a company in a period of 6 months, there is no sense in getting out all at once. It’s better to get out slowly, over time.

Companies with moats, or unquestionable management are allowed to run up higher since people would be more willing to hold on to it for those reasons.

@greengoblin

Cyclicity is very difficult to predict (at least for me). ConCalls can point it to some extent. But things can become very uncertain without warnings.

I am not sure about this. Can we predict the exact top or exact bottom, probably not. But can we predict whether we are in the bottom half or top half of the cycle, probably yes. Please see the thread on National aluminium company by harsh, and also the one on cyclical investments by harsh (harsh.beria93) . Both of them are very good sources and he’s probably a more authoritative voice on the topic of cyclicality.

what we are predicting is: “are we nearer to the bottom or nearer to the top?” We aren’t predicting when the cycle will turn.

@greengoblin

Thirdly, if I may ask, what was your conviction behind Sirca Paints? Going through the ConCalls, I found their mention on little to no pricing power (which is decided by Asian Paints and Pidilite, and followed by Sirca). It questions my understanding of moat.

Please observe that my investment philosophy does not hinge on finding moats. Moats are incredibly hard to find. Besides, does it matter whether sirca can set prices or not? Very few companies can. The classic example of nestle for baby food comes to mind. Even Asian paints , for wood tarnishes, cannot really set prices, can they? These things are incredibly hard to measure and mostly are things we simply say to build a narrative in our minds without any sense for measurability.

My brief reason for investing in Sirca: Sirca is a play on the growing affluent class in India. They create high quality wood coatings and have tie ups with many respected clients like Godrej, Greenlam laminates & century ply. With more houses, more commercial real estate and more affluence, Sirca’s business should grow. With the backing of the more prominent mother brand sirca italy, Sirca India is well positioned to take on Asian paints and other competitors, specially in wood coating which is their forte. The core business has high return ratios (ROIC) meaning it would not need frequent equity dilution and external capital infusion. And as importantly as the earlier point: It was available at a TTM P/E ratio of 20-22 when I started buying. The company seems mispriced mostly due to its small size. The wall paints business is an optionality and could surprise on the upside. Sirca has most of the qualities right now that could turn it into the next large paints brand, if they can execute well. And this remains the biggest risk. If your question is: why won’t ICA pidilite and asian paints price sirca out of the market? i do not have an answer for that. They might as well. I express my uncertainty about companies via position sizes. Sirca is one of the smaller positions in my portfolio. As i learn more about Sirca, either my conviction would increase, in which case I’d increase position size. Or I’d realize my investment thesis was incorrect, and I’ll sell out.

[sameernics]

Just a point here on Sirca, especially on the premium Italian wood coatings, they exist over 10 years and have credible leadership position in North India. I guess even ICA Pidilite and Asian paints is still struggling to establish in this premium wood coating segment. That could be one of the reasons why both were unable to price Sirca out in the market. Even the Sirca management has confirmed that the pie is so sizeable that there is enough for everyone and not a threat.

Discl: Invested.

[sahil_vi]

Invested in Astec Lifesciences recently (~3.5% of PF). Full post here.