Simple Investing

[krishnasristy]

In this post, I will try to put together two interesting studies on portfolio construction and long term investing.

Study 1: Suppose I entirely focus on picking stocks that double in 3 years, how many such stocks will I require in my 10 stock portfolio to achieve portfolio IRR of 20% (Buffet standard) assuming I begin with equal allocation.

Below table gives the answer

Conclusion: It is ok to have a 50% error rate over a 20 year period while trying to pick “2x in 3 years” stocks. Still, one ends up with 20% IRR. Investing is a field that tolerates very high error rates if the horizon is long enough!

Study 2: What is the ideal size of a portfolio that allows a good error rate in picking stocks?

To answer this question, lets run the above table for 10, 15, 20, 25 stock portfolio sizes and compute how many “2x in 3 years” stocks are required to achieve portfolio IRR of 20% over various time frames. From the computed number, let’s compute the allowable error rate %. For example, in a 10 stock portfolio, if 9 stocks are required with “2x in 3 years” characteristics, then the tolerable error rate % is 10%, Below table shows the tolerable error rate for various portfolio sizes

Voila! there is hardly any variation in the tolerable error rate when the portfolio size is changed.

Conclusion: Do not overburden yourself by putting more number of stocks in the portfolio. Just try to minimize the error rate as per the above table. In fact, the more number of stocks you try to put in a portfolio, the higher chances of making mistakes and achieving poor hit rates of “2x in 3 years”. Over a 15-20 year time frame, if 50% of your portfolio is “2x in 3 years” stocks, you will hit 20% IRR over entire 15-20 year period.

Just buy high quality businesses at good valuations and sit tight. This is a statement seen at many places. Above explanation is numbers version of the same story. Only ask two questions while evaluating a stock. Is it a 2x in 3 years story or 10x in 10 years story. If the answer to any of them is yes, go ahead and buy at a reasonable valuation. Else, find another one.

PS: I have recently started to write a blog to keep journaling my learnings and analysis. It’s here.

Power of Compounding

You may not find anything substantial until few months, but my endeavour is to keep it up and running.

[Investor_No_1]

@Likhitp

Any thoughts around HUL? Any specific reasons why you have not added it to your portfolio? Would you add at these levels, considering the long consolidation?

@Likhitp - I consider HUL as a very good, competent company ideal for holding & long-term investing. Reason for not adding so far (I did have a small position sometime back which I had exited) is probably because with limited capital & already high allocation to FMCG, I wanted to focus & chose companies which I felt had a gap to fill (after of course the company passing the corporate governance & management ethics part). I see HUL as already a highly efficient company present in most of the areas they can target. Also, its the largest FMCG company so among large caps and already efficient companies, I think I chose a Nestle over HUL considering better gaps for Nestle to fill at product level in India. I may agree with you that consolidation times are probably the best times to accumulate highly efficient and fully valued companies and so are the times of dips & market crashes…

Disc: Not a buy/sell recommendation. Views for academic purposes and I can be wrong in all my assessments. Not eligible for any advice

[Investor_No_1]

@Investor_No_1

oday I share the stock which resulted in substantial capital loss for me and hence the learning is also substantial. The stock is Max India (before demergers and also after). I started accumulating Max India few years before the demergers as I liked few businesses it operated in. I also liked the strategy & execution of the promoter…that is until then. Demergers - I again thought was a huge value unlocking exercise and I started accumulating all individual businesses. The businesses I liked were Life Insurance, Health Insurance, Senior Living in the order of liking. What I got as inheritance were Hospitals, Packaging, Real estate…and a Promoter which were on continuous lookout for exit!

@Investor_No_1

My exit in both Max India and Max Financial were at the wrong times…Just before they made their final deals. I am happy that they happened at the worst of Times, as they gave me the best of Learning!

…And the learning continues!!!

I was calculating, had I not exit Max India…the now “Max Healthcare” under able leadership of Abhai Soi would have been 15X and that too on one of biggest allocation then. It would have been by far my largest portfolio stock by big margin.

Max Ventures would be a decent 7X riding comfortable among the Top 5.

Max financials I exited later, and it would be 2X again in Top 10.

The total Max group as I held prior to demerger would have been my best investment till date in terms of wealth & value creation sitting at Top position forming an whopping 40% of my portfolio!!! (approx.)

Whoa! The wonders of long term investing if only we buy right businesses and believe in them in the thick & thin and all the uncertainties that come with them.

The good thing which happened with these Max group was that all of them ultimately found good Homes!!

Disc: Not a buy/sell recommendation. Views for academic purposes and I can be wrong in all my assessments. Not eligible for any advice. All estimates are approximate and can be completely wrong in my calculations.

[prem_shankar]

I think the catch is the difficulty in finding stocks that are doubling every 3 years over an extended period of time. For most people, one or two such stocks would make their life. In most cases, we are repeatedly stuck at row 1 of your table , where the margin of error is the lowest.

[akash_das]

I think the thought process at the time of selling should be focused on as the circumstances may have suggested that selling is the best option at the time. The stock price may fall or the group collapse after few years. To protect our capital we can either sell during fall or have wide diversification so the some companies collapsing don’t effect the portfolio.

[krishnasristy]

Thanks for sharing your perspective. I will try to put the conclusion a little differently and see if it makes more sense. If at any point of time in 10yr journey, if half of the stocks you hold have the potential to double in next 3 years, it will mean an IRR of 20%. Your views are welcome on this

[Investor_No_1]

Its been a very strange learning for me in some MNC controlled stocks. I am writing down random thoughts before evaluating the learning structurally.

I had invested, albiet in small percentage of approx 2% each in Agro tech foods and Johnson Hitachi AC. Why? Excellent parentage. Con Agra, Johnson controls and Hitachi all 3 are leaders in respective space. Relatively small caps in India, huge runway of growth and comparable valuations of sector.

What failed so far - Johnson Hitachi had been a great stock a decade prior to my entering. Business was riding positive waves. Then covid happened and it never recovered. Now probably I know why when someone posted a news in its thread that Johnson Controls want to sell their stake.
Same for Agro tech - Con agra was never serious about India business it seems and sold out and that too at significant discount.

How to catch such Promoter and management intent so that you do not hold future losers inspite of all good initial checks.

This is a case of gradual/silent loss of company vision from growing its parentage in country to lookout of exit. They do not even want to exit at peak of their business performance to get maximum exit returns. They are ok with whatever they get…thats the sad part…

Secondly, how to judge if new buyer will trigger a turnaround…if business is good…

referring my Max India/Healthcare’s frustrated exit only to see stock 15x with new promoters in next few years…

Disc. Invested biased. Not eligible for any advice. Post only for learning. Can be wrong in all my assessments.

[Investor_No_1]

Last few months have been watching significant up moves in Power, energy, engineering, infra, defence etc. when I held nothing of these sectors. It was a bit easier because I had done my portfolio creation exercise couple years back and junk removal an year back or so. I was not in lookout of buy & neither exit so just held back and watched.

Got a taste of how wild things happen with stocks. First taste was in Tata Elxsi couple years back when IT was the word…got a quick 10X and after that stock has done nothing last 2 years or so…I never bought it for a quick 10x or whatever so it just sits there.

Second taste came with Hitachi Energy, which I had bought for technology & not infra/power as these companies are rich in technology. With power the word now, got a 10x here as well in couple years or so.

While the taste was good, it did not satiate the appetite, because initial investment was meagre and now they form maybe 2-3% of portfolio even after 10x.

However, with a little better portion of Trent to begin with, a quick 5x did seem to impact a course a day meal.

There have been likes of HDFC Life and good old Dabur, where initial investment was worth a full meal but it still remains a meal. With so much time lost, the meal maybe even stale now.

Portfolio looks like below. 90% can be considered core now after junk removal exercise done an year back or so. Remaining 10% non-core, looking to build some positions there with couple of them. The “Weak” conviction ones are something to be trimmed when opportunity is right. Either the conviction needs an upgrade or the portfolio when it comes to them.

Edit: I admire the big change @Mudit.Kushalvardhan has brought in his investing strategy. From a pure fundamental to a momentum/stage/techno-funda approach. Admire the zeal to learn & change themselves. Lower than expected/peer/certain index returns may have been initial driving force. I have faced similar situation last year or so but haven’t got the energy, zeal and aptitude to learn the technical aspects and change my style. I believe its one of most difficult task in investing - To change one’s style which one has stuck since long. So Kudos to @Mudit.Kushalvardhan. CAGR would follow the person who puts in the extra effort and is also gifted with the aptitude!

I will have to settle with lower numbers considering my style, aptitude & zeal.

CORE Portfolio

Company	Percentage	Holding Period	Conviction
Tata Consumer	15.5	Long	Strong
Trent	13	Medium	Strong
ITC	9.5	Medium	Strong
Pidilite	8	Long	Strong
IT basket	6.5	Medium	Strong
Godrej Consumer	6.5	Long	Strong
Marico	6	Long	Strong
HDFC Life	4.5	Long	Medium
United Spirits	4	Medium	Strong
HDFC AMC	2.5	Medium	Strong
Avenue Supermarts	2.5	Medium	Strong
Nestle	2.5	Medium	Strong
Dabur	2	Long	Medium
Asian Paint	2	Medium	Strong
Hitachi Energy	2	Medium	Strong
Britannia	2	Long	Strong
United Breweries	2	Medium	Strong

NON-CORE Portfolio

Company	Percentage	Holding Period	Conviction
SBI Life	1.5	Long	Medium
Johnson Controls Hitachi	1.5	Medium	Weak
Spencer retail	1.5	Medium	Medium
Agro tech Foods	1	Long	Weak
Nelco	0.5	Short	Strong
Restaurant Brand	0.5	Medium	Weak
Max India	0.5	Short	Strong

Disc. Invested & highly biased. Not eligible for any advice or recommendations. Post is only for learning purpose. I can be wrong in all my assessments.

[Gaurav_Bhandari]

Hi @Investor_No_1 ,

I see that you initially had sold Max India and now again you have a small position in it. Would you be kind enough to share your thesis for re-entering?

[Investor_No_1]

@Gaurav_Bhandari

I see that you initially had sold Max India and now again you have a small position in it. Would you be kind enough to share your thesis for re-entering?

Earlier I had the erstwhile Max India (before demerger) which included Max Healthcare, Max Ventures and Max finance. Yes, I had sold all three and at bang on wrong time after getting frustrated. All three businesses were excellent but promoter intention to exit had been hurting returns. Finally all three got good homes and went to do excellent.

Regarding re-entry, its in the Max India catering to senior living, care homes etc. part. Again the business is good and very long term in nature. Having seen Max India erstwhile ups and down, I have conviction that sooner or later this promoter does well with its companies either with it or exiting it with right deal with right people.

Last time I did not have patience and there was no precedent to learn from. This time, having learnt from past on same promoter, I have trust (for now) that over long term, value will be created.

Also, last time 10% or more of my then portfolio was invested in Max. That was big enough number to be losing patience if we lose even little bit of conviction. This time its just 0.5% now. I wanted to scale up to maybe 2-3% to begin with but stock ran up too fast after my first entry.

Disc: Same as above.

[hardik_shah1]

Hi, Any new thoughts or info on Xchanging solutions after three years?

Thanks in Advance

[Investor_No_1]

@hardik_shah1

Hi, Any new thoughts or info on Xchanging solutions after three years?

This was one of the companies I think I weeded out when was fine tuning portfolio couple of years back or so. Reason being that I was unable to find more details about it and unaware of vision of parent etc. I could see better certainty in some other well established midcap IT names hence I weeded it out of my technology and non core basket then.

After that have not tracked it at all. Are you aware of more details about it now?

[hardik_shah1]

I have just about started looking into it.

The concern is the limited areas it plays in and the lack of management will. The main question is whether this is constrained by the parent. Almost minimal information is one more drawback here.

Will likely put it in too hard to analyse pile and move on.

[Investor_No_1]

Last few months I had taken my mind off active investing and looking out to buy anything significant. Off late started to buy some select stocks.

The sector rotation & same old themes of last 2-3 years seem to be doing well for momentum/stage investors. I am now seeing a trend of many investors flocking toward the momentum strategy and trying hard to learn & practice it. Reason is obvious - success of this strategy in last few years. Many DIY investors have joined this club.

Personally, I think I have reached a personal investing strategy stage where I no longer care for even the CAGR of the portfolio YoY or in whatever timeframe. Why is that? Thats because I have now started believing in the businesses & my stock selection to the extent that I am sure over long term I will get desired results so it’s a futile exercise to track this aspect anymore. (Although I would track it over long term but at a very high level).

With God’s grace, I have learnt beautifully to stay away from noise, FOMO, sectoral trends, hot stocks and what not. Off and on, my portfolio stocks catch momentum one by one, and I find it amusing when they do. Somehow, I do not like the momentum investors entering my portfolio stocks (although there is nothing, I can do about it, it’s just a personal feeling), that’s because many times they run much ahead of fundamentals and me being salaried simple retail investor, have to buy my own stocks at much higher prices than I would have got opportunity to had they not joined the momentum or reach Stage 2 (or whatever).

I enjoy excellent discussions on businesses, vision of companies, promoters, ethics, global policies, positioning of India, economy in general and how companies fit in rather than on which stocks will give good or maximum returns. Guess I was wired like this from the very beginning of this complex yet Simple & ongoing journey.

Thanks all for being there for these beautiful discussions and looking forward to many more such!

[GRP]

That’s a moksha . And congratulations for achieving it .

[gsapte]

@Investor_No_1

Thats because I have now started believing in the businesses & my stock selection to the extent that I am sure over long term I will get desired results so it’s a futile exercise to track this aspect anymore.

I liked this philosophy. In fact, after reading “One Up on the Wall Street” multiple times, and doing some back testing on various stocks which I had invested or rather moved in and out based on valuations, I have realized that, if I could have stayed away from FOMO and would have invested in only those stocks which I understand well then also I could have achieved the same CAGR at portfolio level instead of buying some unknown businesses and closing the position in Loss since I was unable to bear the loss sometimes due to lesser business understanding.

Sometimes, simple strategies can beat all kind of styles like Momentum, Low volatility indices and what not. These styles generally come after every 4-5 years and then disappear.

Simple Investing strategy can stay with you for much longer time with almost same results.

[Investor_No_1]

@gsapte

Sometimes, simple strategies can beat all kind of styles like Momentum, Low volatility indices and what not.

Agree results are good, but one thing would add, there is no competetion and no inherent need to beat any other strategy or style. Its just to be ok with results of my own companies and hence no need to track much.
So, I do not care if I get 15% or 20% or 30% cagr etc as long as I get a minimum expected threhold over long term as long as I like the process and underlying companies keep doing well in business with a long runway.

[Investor_No_1]

@GRP

That’s a moksha .

haha i dont think there is such moksha in investing…its a transitionary stage and may change in future with evolving experience & market conditions.

[Mehul1]

I think the momentum or stage investing etc are born out of FOMO factor. Market has been bullish since last few years and is rewarding every strategy. Majority of stocks have run up irrespective of fundamentals. If there’s a correction of 20-30%, all these strategies will disappear along with rookie investors.

[Investor_No_1]

@Mehul1

think the momentum or stage investing etc are born out of FOMO factor

To an extent maybe yes, but there are also set of excellent investors who are wired that ways irrespective of market conditions. These set of investors may be the ones who have practiced that strategy across market cycles and stuck to it as it’s the way who they are…