Simple Investing

Investing Strategies
21

So far, I have been able to devise a simple yet effective way of buying companies…however yet to identify similar simple approach of selling companies.

I have been 100% right in selling in cases where I see the red flags that I have identified for myself so far. Been very few such occasions because I tend to buy good companies and my buy criteria is very strong.

However, I have been almost 100% wrong in my sell decisions when I sell for switching from one opportunity to a better second opportunity or consolidating existing holdings.

This clearly means the sell strategy needs lots of thinking and rework, specially when the capital is limited and in case I target to become a full time investor - because in that case I would not have a salary any more and would need to depend on rotating existing capital. Also, in order to generate the kind of capital to even become a full time investor - you need to sell and rotate to generate the extra alpha.

Therefore, I feel for moving to next leg of investing, such as full time investor - I need a solid yet simple sell side strategy. I need it in order to rotate the money to generate the required alpha to even reach that stage first and subsequently sustain that stage in absence of regular salary!

Thoughts on simple sell strategy for rotation of capital to generate alpha welcome, considering the buy companies are very simple, excellent compounder businesses in the first place!

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22

If your buy criteria is strong, it essentially means that you invest in good companies, then why would you want sell such companies? No one would argue with the opportunity of investing in a better company compared to the invested company. Other than that if you have invested in a good company after it passes your checklist, why would you want to sell?

If you have selected a good company you are invested for the long term, it means that you have been following the company for a few years, a couple of years at the least. So you can analyze the problem better which was the reason for the price to fall, which made you think about selling.

That issue could be temporary or permanent, if you can understand that selling is easy. If you are not then it is a different situation, you could be in a good profitable position and if you sell and come out and if the issue turns out to be temporary, the price moves up again and you will have to buy at high price, and if you don’t sell and the issue is permanent you will be losing profit.

Or you could do what everyone else is doing, no matter how wonderful the company is, check the charts, if everyone is selling, sell. Then again there will be buyers at this point, why are they buying at this price when everyone is selling, is this price good, why are they not waiting for the stock to fall more, check the volumes, who is buying? Sell, come out, watch and enter again, no guarantee the price would have fallen more and your decision of selling turns out to be correct, it could be wrong and selling could be wrong.

Some investors take a 2-3 years view for an investment, if nothing works out in that time, they come out so as to invest in a better opportunity.

Then there are investors who will not sell, if the long term story is intact and there will be a lull period for a couple of years, they stay put.

No wonder they say selling is tough.

P.S I am yet to experience everything I have said, just my thoughts.

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23

The crux indeed! Let me explain a bit more to make clear my thought process.
I have a mix of a decently concentrated as well as a diversified portfolio at the same time. Almost 50% is in top 5, 20% in next 5, 10% in next 5…making solid 80% in top 15 picks. I would call this the Established Core - Why that because of two reasons - 1. I hold these for pretty long term, most of them, and 2. they have reached the percentage not just because of invested amount but because of market forces as well.

Now comes the long tail, Final 20% is distributed in around 20 solid firms. Unlike the momentum investing strategy or other investors who call such part as Satellite portfolio, I would rather call it the Potential Core - Now why this and not satellite is because 1. Each of these companies have passed my buy criteria. 2. I have not invested in these to play short/medium term momentum 3. These are no cyclical, turnaround or any other plays 4. These are companies which maybe as good as the Established Core and are a small part of overall portfolio only because of reasons such as - a) Limited Capital b) New Entry, New Idea c) A limit set in mind for invested capital - Let market forces do the rest over long term. 5. As a matter of fact I may not be much uncomfortable if any of these 20 companies even formed 10% of my portfolio today. They just dont do that because I dont feel like selling the ones that already are 10% and because of reasons mentioned in point 4.

So why a Sell strategy and why such a long tail - The established core is set of companies almost a decade old in portfolio. With time, new economy ideas emerge - Like Digital technology today, Health tech, Fin Tech, Engineering IT, Cloud, Electric Vehicles etc. etc. today. If we are in world of investing, we cannot just sit back with the companies we hold, no matter how much strong they may be, and let such ideas go ahead without a meaningful allocation in them. Such ideas will keep coming - But capital is limited, specially for those aspiring to be a full time investor one day - it is even more limited due to absence of salary.

I am not saying I would sell any of the established core, but there could be strategy around trimming - although this is again a recipe of long term disaster of trimming your winners, and then about the potential core - here some sort of sell strategy can and should exist wherein the potential core tail can be refined.

I know for this I would need to know each for eg. 35 companies in portfolio in and out and how would they relatively fare over say next 10 year (considering they form even 1-2% of my portfolio means they should and would do well but which one would do better I do not know) and then make a sell or replace call or call to increase allocation towards it becoming established core. I am also well aware that this is not humanly possible, and those who say its possible can go wrong most of times as well. Financial metrics will not give me the answer and I want to depend least of Financials - I am trying to dig deeper into the intangibles part, the business part and think more of where I want to be in and make the entry criteria more stringent - maybe that would indirectly reduce the pressure on having a sell strategy!

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24

Big plans and big PF it seems.

If you are thinking in terms of PE expansion ahead of fundamentals with your established core stocks, I suggest you go through the Page thread (if you have not followed this particular discussion), it could help you in trimming your established core, as some views were expressed w.r.t the unsustainable nature of such PE no matter how great the stock or business has been, the template on which the past performance was based on is not useful for the future of the business, no growth visibility elsewhere etc. A part of your established core might be going through this phase, this could help you trimming a part of such stocks and allocate more to your potential core.

It is a crux to cut down something that has grown big, particularly when it is still yielding results and big can get bigger too.

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25

Selling a stock is as difficult as buying one I believe specially in a raging bull market like this one. One thing that I have realised is that I need to build a portfolio that doesn’t exite me or rather I don’t feel the urge to check their price movements everyday, the only way to perfect the sell strategy would be to remove the emotions; both greed and feer from investing and focusing solely on the business perspective of a company. The stock prices might lag sometimes and migh run ahead at other times but if the reason we selected the stock in the first place still remains, we must not sell. I have a few whose prices I rarely check like Polycab, United Spirits, Hikal and Sequent and I wish to either build so much conviction into other holdings that I will not be concerned by their price movements or replace them with such companies. The aim for me is to remove the price bias from my investing decisions.

@Investor_No_1 Please share your portfolio with us so that we can learn more from your strategies.

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26

Thanks, although I wanted to discuss more on learnings rather than my portfolio as portfolio is something dynamic and I may not update here whenever I make any changes but if sharing it makes us discuss better then here you go. Below is current composition of Established Core which is 80% of total portfolio

Company Percentage Allocation Holding Period
Tata Consumer Products 15 Long
Marico 10 Long
HDFC Life Insurance Company 9 Medium
Pidilite Industries 9 Long
ITC 8 New
Godrej Consumer Products 7 Long
Dabur 3 Long
Trent 3 New
SBI Life Insurance 3 Medium
United Spirits 2.5 New
Britannia 2.5 Long
Nestle 2.5 New
HDFC Bank 2 New
Avenue Supermarts 2 New
Agro Tech Food 2 Long

Below is the Potential Core part of the portfolio which is approx 20% of overall Portfolio

Long Tail Packs (Total 20% of Portfolio) Percentage Allocation Holdings Holding Period
Technology Pack 5.5 Oracle Finance, L&T Tech, Tata Elxsi, Mphasis, ABB Power Products New
Consumer Discretionary/Durables Pack 7.5 Whirlpool India, Voltas, Hitachi India, United Breweries, Burger King New
MNC Pack 7 3M India, P&G Hygiene, P&G Health, Tata Chemicals New

Disc: Not a buy/sell recommendation on any stock. I may change my mind & allocation on any of these stocks anytime without informing or updating the forum. Sharing above only for academic and learning purpose and not as any advice. I maybe completely wrong in my assessments on the stocks in my portfolio

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27

Interesting thread…

I would differ a bit here on Max group. I have held it long back. Issue here is not conglomerate but others:

  1. First corp governance was not top notch.
  2. Hospitals, insurance elder living etc needed massive investments. Packaging films was low returns biz and did not generate enough cash to fund growth biz.
  3. Too many transactions of stake sell/buy and restructuring.
  4. Not a cost conscious promoter.

Conglomerate’s are not bad per say if it is right mix of biz. Anyone would love to hold Tata Sons. Growth will be slow but these can be held for real long term.

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28

Agree on all the issues you pointed out as well. I did mention that there are exceptions in Conglomerates but I would chose staying as exception myself in such businesses

Agree Conglomerates may not be bad, however if I have a choice I would invest in underlying pure play Tata businesses that I like rather than in Tata Sons. Precisely same reason I have not invested in RIL although I like Jio Platforms and Reliance Retail. I have chosen Trent & Avenue Supermarts as pure play retail instead and am silently waiting for the right pure play digital asset to list.

Imagine, what happened in Jio platforms last year would have easily made a pureplay listed Jio go 10X when RIL actually went 2X. I would find better 2X options in pure play businesses I like which are easier to track…

Above are just personal choices and nothing right or wrong. I respect your views as well as many conglomerates, including RIL, have created immense wealth over long term!!

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29

I like your idea of simplifying things and focusing on pure play. But never write-off anything.

But there is another aspects which has helped me and you may find useful. I have been an FMCG investor. And just have HDFCs+Titan+top pharma. I find it very difficult to own anything else. But I realized that when economy turns around one must hold cyclicals in portfolio. That pushed me to buy L&T and M&M. Now I would have never bought these businesses if it was pure construction and auto biz, having lost money in past and knowing it is low return/low FCF bizs. As they are well diversified with holding high return/FCF subsidiaries I am able to build conviction to hold these cyclical, knowing that if cycle turns -ve downside is protected. It is a novice approach but works for me.

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30

Thanks, I like your idea of never writing off anything, will keep that in mind

This was a point which was in my mind and was about to mention that conglomerate companies sometimes do help to protect downsides. This may even be true in non cyclicals. Maybe true even in case of new age technology if say it doesn’t work then downside can be protected.

True that, for balanced portfolio need to have strong economy facing stocks. I missed both M&M and L&T in market lows. I thought over this aspect that what are strong economy facing stocks that I have which can grow much faster when market opens up. I found my answers in

  1. Retail - Avenue Supermarts, Trent
  2. Consumer Durables/Discretionary Pack - United Spirits, United Breweries, Whirlpool, Voltas, Hitachi etc.
  3. Pidilite Industries and somewhat even ITC

In above names, I gain exposure to the recovery stocks without being in cyclicals and in structural growth stories from top business houses/MNCs. They were carefully chosen keeping this aspect in mind as I wanted to be in consumer facing non cyclical plays as much as possible.

But I agree, I missed the M&M, L&T and Tata Motors at great prices as I was waiting for a deeper bottom in cyclicals looking back at 2008 crash downsides!

Disc: Not a buy/sell recommendation. Discussion only for academic and learning purpose.

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I really admire your comments in this as well as all other threads. Your comments make me feel that you have a very independent and strong thinking process. Would really be great if you have your thread or your portfolio which can be a great mutual learning opportunity!

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Great picks @Investor_No_1. Kudos. Nice learnings shared. I have most of the stocks common in my Pf except Trent and ATF. As they say holding period for good and quality companies is what matters a lot in long term.

Keep your experiences coming.

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33

Updated my latest PF

I see some comments from you there.

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34

Hello All,

I am new to investing. I have been aware of how the stock market functions, but long term investing is an entirely different scenario.

I am slowly now entering this space and trying to understand how to select good companies. My first and foremost source of information is the annual reports, quarterly results and concall transcripts, if any.

I am just putting herewith few of the points that one should look at while deciding what company to invest in, based on whatever little knowledge I have:

  1. Sales and sales mix
  2. Amount blocked in inventories and receivables
  3. Interest expense component
  4. PE of the company as compared to PE of the respective sector or of peer companies
  5. Management history
  6. Entry barriers in the business in which the company operates

I had a few queries, if anyone can help in this:

  1. I am aware that a lot of people use screener to generate ideas. But how does one determine what criteria should be set? Do you have a preset criteria that sales should be above a certain number for a company to be considered as a potential investment opportunity?
  2. How does one determine whether the management is honest and not unethical?
  3. In terms of cyclical businesses, how does one get knowledge regarding demand picking up in a certain sector (for example, in the last one year or so, Steel and Sugar Industries have done really well)

Any other advice also would be highly appreciated.

Thanking everyone in advance.

Hemik

35

Although I may not be best person to comment but I can provide my thoughts/perspective on each point -

  1. Till date in around a decade, I have not used Screener even once. I have read about it many times in VP forum and must be a great tool but I have not even visited the site more than once. It can certainly be a great tool, but that is not how I select or shortlist my investment candidate. I do not look at numbers first and business later, its the other way round. Just for the sake of example, I happened to be attracted to the gaming industry and growth/runway potential and reached Nazara as an analysis candidate that ways rather than a trigger of 100% sales growth in Screener or any such websites. So, to answer your question - there can be many ways to identify potential candidates and such ways depends on your own strengths and what works for you. Understanding businesses and intangible aspects works better for me than current numbers…

  2. This is probably a journey and one of the difficult aspect for minority investors. It is even more difficult if you go for small caps or unknown companies. I usually target companies from well known business houses with a history but aspiring in a new segment/industry, MNC subsidiaries looking for growth in India, PE controlled firms etc. and this is a conscious choice as I do not have a solid means of identifying promoter quality otherwise. Even in above sub group - many times we may end up in a bitter surprise!

  3. Unfortunately or Fortunately, I have stayed away from cyclical businesses so far. With limited bandwidth of both time & capital, I have chosen compounder businesses to study more. Here rewards come late, but they do come if you chose quality company. More importantly, the rewards are sustainable and urge, panic, need to sell do not come every now and then. It is simple for me that ways. I may not be able to generate the extra alpha but fingers crossed, maybe spared the extra “zeta” of crash when the cycle reverses.
    Now this does not mean that my category of investors are not capable of identifying momentum/cycles etc - but probably they know they would one day be damn wrong at it and there could be many such one days…so the joy of being right maybe short lived!
    You may direct this question to some expert momentum investors in this forum and there are many doing great. It requires studying various domestic, global, regulatory and what not aspects, lot of efforts but certainly doable if one is in for the hard work and discipline. Maybe one day, I would try this cyclical investing when gain more maturity!

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36

Regarding the usage of screeners, they save a lot of time because numbers don’t reflect everything that pertains to a business but they are not the tip of the iceberg either, they reveal a lot about the past, sales, profits, margins, returns, cash flows, fixed assets, debt, dividends, share holding patterns, so on and so forth, and not to mention the biggest them of all price movement.

In essence once you get accustomed to using any screener you simply skip a company without wasting anymore time unless something intrigues you or you sense some change in the numbers.

And this exercise saves a lot of time and effort because what is the point of reading a transcript if you can sense that in the numbers, as number do not lie unless they are cooked of course.

I am a novice and I use screeners, even I can skip or continue depending upon what I see in the numbers.

I guess as you are a quality and core PF investor who does not churn often, you don’t look for new ideas as much as others.

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Agree, I get that info from Google, ET, Moneycontrol, BSE website and so far seem fine to me. Point I wanted to make is first I select the company and then look at the numbers and not vice-versa…

Agree again that I look for quality and core ideas but one point do not agree is not look for more ideas…infact at any point I have sufficient more ideas but insufficient time & capital! Even for quality core companies, there are many options in India…

38

This is a double edged statement. While ratios / numbers can tell you that a business passes your criteria, often some of the best stories are missed simply because they don’t show up on screeners (example: Laurus Labs’ ratios pre 2021).

One could refine a search to look for relative metrics, comparing a company to itself three years ago and ask if it is becoming a better company with time, but screeners are only backward facing (with perhaps the sole exception of CWIP), and can’t replace transcripts/annual reports in understanding what the business could look like in the future.

I say this after running hundreds of different ideas through screeners, and have come to not discard any company at all and spend time on learning about it even if it looks disgusting on paper…

Wouldn’t you also agree that finding new ideas isn’t linked to screeners at all? You could look through Valuepickr, or come across new companies because your favourite PMS / mutual fund investor has decided to enter, or through an article that mentions a particular product. I don’t think wanting a low churn portfolio has anything to do with looking for new ideas at all.

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39

By ideas I mean not the well known companies which everyone knows about but wait for a correction in the price. I think people use screeners for lesser known or small cap companies. I guessed you don’t do that as much as others.

There have been instances where someone in VP invests or introduces a company to us by mentioning one or the other filter criteria was met and a company showed up on their screener and they invested.

I don’t think people who invest in companies with good track record, run by good managements which have weathered market cycles, need screeners. Perhaps they look at charts to find an entry.

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40

I invest in well known companies but do not wait for correction in the price if a company passes my buy criteria. There are so many well known companies, even is small-midcap range that I do not need to look beyond that for generating 25% CAGR YoY if I make right decadal moves within that universe itself.
For example, Tata Elxsi from the Mega TATA group was a mere 500 crore company just 6 years back…I think I need not explain this point anymore…Thanks

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