Simple Investing

Investing Strategies
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You may or may not be going wrong. As long as you are fine with your results, nothing else matters. I can give my view point which may not be right for you

All three are proven large cap nationalized banks of India. If I call this as basket approach then all mutual funds in India are following this basket approach as 99% of all large cap MFs and even many mid cap ones have presence of these three banks…

So, what do I call it? I think it depends on the reason why each is there. Is it just to follow tailwind in the sector for short/medium term…if yes then I would call it basket approach

But if each one has its own long term role to play in your core portfolio, I would call it as a sector heavy core and probably not a basket approach.

Again, if the varieties were chosen to simply be invested in the sector without any clear cut role, space for the individual stock, it is a basket approach for me…

Yes, this also looks like a well chosen basket…an informed basket approach…

So in short I think for me, if each individual stock is not present out of its own long term strategic role in the portfolio and a long term roadmap, it will form a part of a basket…

Disc: Views personal & only for academic purposes. I maybe completely wrong in all my assessments

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Last few days, weeks have been really good in evolving my thinking over the new sectors/companies I have invested in last couple of years or want to invest/add now. Thanks to some really good discussions on this forum helped further…

Its helping to clear the clutter, few thoughts -

Core Sectors - Each stock has unique story with which I am comfortable

  1. FMCG
  2. Life Insurance
  3. Adhesives/Paints/Construction Chemicals
  4. Retail - Fashion & Non-Fashion
  5. Consumer Discretionary

Potential Core Sectors - Each stock story is still evolving, need to watch closely and take corrective actions as intend to be in the sector, however need to chose winners wisely

  1. Technology
  2. Consumer Durables (Appliances)

Sector in Question - Sadly, the sector with one of the highest growth rate is becoming the sector in question as none of the listed company is a brand owner, except maybe Burger King - but that has its own issues of capital allocation. Boils down to the same story - Jubilant massive success came even though it was/is not a brand owner…difficult to ignore this sector as well, but certainly there seems something off at the moment. I think this sector needs maximum scrutiny from me

  1. QSR

Disc: Invested & Biased. Not a buy/sell recommendation. Post only for academic purposes.

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Jubilant is market leader in QSR space, so in my view better not to sell it. It got over valued too much and has corrected more than 50%. Will it fall more, I do not know.

Disc: Invested adding little bit on every 10% declines.

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I am not taking any sell decision immediately now. Already did consolidation of QSR basket from 5 to 3 holdings. I agree with you on Jubilant market leadership.

Intention is to scrutinize each member of the basket to ensure that it holds significance to me as an individual pick.

  1. Jubilant has had a great Dominoes run…can it replicate same growth over next decade?
  2. Will it’s new ventures be successful along with Domino’s showing decent SSSG?
  3. How the new management executes and
  4. how does it’s relationship with a new parent (Restaurant brands) works out?..these are some immediate questions in my mind…
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Some random thoughts on Simple Investing :

  1. As per Howard Marks , " Since the notion of market efficiency has relevance, Investor should limit his efforts to relatively inefficient markets where hard work and skill would pay off best"
    so Efficient Market Theory, informs us to stop wasting time in the mainstream markets, but at the same time, limitations of Theory suggest to stop accepting the arguments against active management. So if we accept the theory whole, then we have to give up on stock picking and surrender to Indexing and passive investment and miss out on the contribution, skillfull individuals can make. “Let others believe markets can never be beat. Abstention on the part of those who won’t venture in, creates opportunities for those, who will”

  2. If I think on above lines of Howard Marks, what strikes me is, there is absolutely no need to invest into such stocks which are part of main market, as they will deliver the returns similar to Nifty Index and you better off investing into Index instead of such stocks, to avoid unnecessary reading of so many annual reports, concalls , Credit Rating Reports and waste time on these activities as there is absolutely no value addition by doing all this.
    Examples are :

  3. Hindustan Unilever stock returns 18% for last 10 years

  4. Nestle India stock returns 13 % for last 10 years

  5. HDFC Bank stock returns 18 % for last 10 years

  6. ICICI bank stock returns 17% for last 10 years

  7. Kotak stock returns 21%( 10 years) 14%( 5 yrs)

  8. Infosys stock returns 18% for last 10 years

  9. TCS 19% for last 10 yrs
    ETC…

  10. Many of these stocks are part of Coffee Can Portfolio of Marcellus…So second level thinking suggest that, those stocks who qualify as Coffee can Portfolio , are actually such stocks which can give Index level returns only in long term.So its better off investing into Index, instead of such coffee can stocks.

  11. Then which stocks should be part of actively managed portfolio?
    Those stocks where, investor’s efforts and insight can help him get superior returns. And doesnot form part of main market or it may be part of main market but growth is superior than Coffee can portfolio stocks…

  12. So part of portfolio, which is invested into above type stocks with Index returns should be transferred to Index funds, and only those stocks which has potential for better growth should form the active portfolio…
    Thus overall portfolio should be of 2 parts…One is Index funds, and other is Growth oriented stocks where returns can be superior. Now the proportion will depend on Investor skills and comfort as well as insight developed by him…

Thoughts and views on my above random thoughts are most welcome…

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128

Interesting thoughts and I think many would have similar thoughts and hence need to look out for new names with better valuations/growth etc.

First of all would start by saying that Index investing/passive investing is a great tool in my opinion and many investors must have benefited tremendously over last 25 years or even more in India…Its a must for those who do not want to do active investing…it may even be better for many active investors and some (including me) may realize this much later, but I would try active, at least, till I resort to Index/passive maybe later on for some personal reasons…

I will just add some immediate points which come to my mind taking example of HUL…

HUL stock was in a decade of hibernation, did Index Funds make use of that? No
Index did not increase its weightage of HUL at this time, but an actively managed portfolio can certainly accumulate a behemoth like HUL to get market beating returns for the next decade…HUL went on to become 10x in next 10 years giving 25% CAGR…dividends increased at even greater rates…

Same for RIL over last few years…and many such examples where such coffee can stocks give tremendous opportunities for market beating returns…that is if you sell…if you hold over very long term, it may normalize again but our incremental money can always generate better returns than Index…

Second, does Index Fund pay real dividends? No
Some may mention that SWP can be used for Index funds if they dont pay dividend as they reinvest same money, however in March 2020 lows like situation, would we do SWP or rather SIP? Dividends for many good companies continued or even increased significantly in last 2 years and although taxable at slab rates, dividends do not put pressure on us to sell shares when we do not actually want to…

Third, companies like JP Associates was once an Index darling. Its no where to be seen now. I know that all such companies are part of the Index game but what if the Index during some significant time frame choses more of such companies for whatever reasons? I do not know how each constituent is determined and hence this question. When I read earlier I remember that the criteria are both qualitative & quantitative…so far has not gone wrong in unison and Index been giving around 15% CAGR over very long term…but in Japan I think Index is stagnated…does it mean that most coffee can companies are stagnated? I dont know, but something to ponder on…

Fourth, Does Index Fund Investing gives us opportunity to invest in the next company to be included in Index? No

Coming to HUL example again, in same sector we have a Tata Consumer from the house of Tatas which was recently included in NIFTY 50 and passed criteria of a coffee can stock (not sure about marcellus, but my criteria) even prior to getting included in any Index. Such opportunity would not come to an Index investor…

Fifth, If one fine day Index really stagnates or any other opportunity arises, will experience of Index investing help, No

Even though we chose some companies that form a part of Index, it gives experience of active investing which I am sure will be of significant use when opportunity arises.

We just need 1 Titan at right time to make that difference!

Disc: Invested & Biased. Not a buy/sell recommendation. Post only for academic purposes and I can be wrong in all my assessments

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  1. Thanks for your views. I agree with your point and now think that, if I have one option to hold HUL or Reliance as individual stock in portfolio and second option to hold them in Index Fund, then its better to hold as individual stock for reasons :
    a) We can time the entry and exit in individual stocks and increase our returns
    b) we will get dividends.

  2. In the example of JP associates…I would disagree, as whenever any company starts deteriorating, by natural process, it will get thrown out from Index. What I know about constitution of Index is 1) market capitalization decides the entry and exit 2) Free float decides the weight in the index…

so failing comapnies will get weeded out naturally…but offcourse it will take its own time. We have example of Yes Bank, which was still part of Index, even after scam…Individual stock picker can eliminate them at early stage.

  1. The learning and knowledge one gets while studying individual companies is beyond comparison. I agree totally. The intellectual stimulation one gets and the depth of knowledge that one develops in different businesses and sectors over decades, is unparalleled. If 2-3 % lower returns compared to Index is also totally justifiable, in return of such vast knowledge and experience and the passion one gets to enjoy…
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I think we should invest in Index funds for Index Funds and not for RIL, HUL etc. etc.
Look at Index Fund as a separate entity with its own benefits and as per our risk profile, allocate the right percentage to it and invest in RIL for an RIL…

In this context, at some stage, I would need to allocate to Index funds, which I have not done so far…as in its own self Index funds serve a unique purpose and play a unique role in a portfolio which individual stocks do not…

Agree to you a & b, I would add a c) we can chose our own allocation to individual stock based on our risk profile and conviction level

Agree, or may avoid them all together in first place

Add to that the readiness/preparedness in order to achieve our own respective targets from active investing…

Would again re-iterate that Index Investing is powerful tool and you may chose/not chose it based on your own targets out of Investing, risk profile and hence allocation. I may chose Index investing myself at some stage when deem right for me…Thanks

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Nice points presented for/against Index investing. Personally I felt that Index investing is good for those who fails to beat index not in short term but in long term on trailing basis. One needs to be objective, data driven and logical enough to conclude on comparison of their invested capital vis-a-vis Index to find out where they stand truly during their entire investing journey and not just get carried away with bull market euphoric return in short period of 1-5 years of investing.

Its very hard to switch from individual stock investing to index based investing because of ego stimulation and challenge presented. Secondly individual stock investing is a full time pursuit in order to get outsized and asymmetrical returns. Those who lacks time or part timer or burdened with personal challenges of office and family should definitely think about index investing because it costs little in terms of time and cost but provides acceptable returns which majority of Mutual Fund fails to beat!

I am in same boat of investor_no_1 thought process as of now but likely to take decision sooner than later.

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Agree with Both of you…Vijay_Kiran and InvestorNo1(If possible,kindly let me know your name, so I can refer your name :grinning:)
A midddle way can be , put 50% corpus in Index fund and 50% in individual stocks and keep monitoring the performance of both for atleast 3 to 5 years…If your own stock portfolio is not beating Index returns by considerable margin, then you can think of going 100 % in Index Funds. Currently my 10% corpus is into index and 90 % into Individual stock portfolio…and as of now, Index fund is winning.

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Another point if I may add here.
Not everyone is comfortable owning a Tata Steel indirectly via index funds and it’s really difficult to generate alpha more than index funds ( very few active mutual funds are able to do that) via individual stock investing. It’s dependent on one’s behaviour and thus passive and active allocation will differ for everyone.
Some may even rather underperform than own a PowerGrid, BPCL, NTPC etc. :slightly_smiling_face:

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Some very nice views from @Vijay_Kiran @Mudit.Kushalvardhan and @vibhor_vaish …I was thinking what does Index funds or rather any mutual fund mean for me and although I do have exposure to some Mutual Funds but when will it be meaningful exposure…

I see that many have opinion that we should or would resort to Index Funds/MFs if and when we realize that we are not able to beat their returns. However, my take is little different than that…although I agree if we are unable to beat their returns then no point in doing active investing…unless we have a target to keep becoming better at it and see that we are becoming better at it.

Another point is for how long we give this time to judge ourself? It depends on multiple factors and to each his own…However, one thing I would re-iterate that if the targets are reasonable and discipline is right, we would be successful in our respective targets…

I generally do not compare my returns to any funds, as I mentioned before that I only look at new highs and deviation from earlier highs and in that I do compare somewhat with Indexes…This is partly because currently I am an SIP kind of investor and still building portfolio…it is difficult to calculate YTD, YoY comparisons etc. but I do get a feel of it by tracking the highs…

I look at Index/Mutual funds as good option if we want to free up our time for something else…I think that is their biggest benefit over active investing rather than anything else! The time we save can be utilized for something else and if and when I feel need to do that, I think that might trigger the movement towards such funds rather than any return comparison etc.

The biggest benefit of active investing is the huge learning and opportunities we get to make it big some day! I think this opportunity is big enough reason to keep trying as long as we see we can stick to our own rules and see ourselves improving.

Another important factor is the concept of incremental money and money rotation. As long as we have incremental money to invest, by virtue of salary or any other regular income, active investing is somewhat easier I feel…however imagine this source is not there…the real character of the investor would come out then…when we do not have money to buy the dips or crashes and depend on our sell decisions and money rotation decision…this is the art which would ultimately determine anyone’s true success in active investing is what I feel…so far I am yet to test myself in this and hence the lack of confidence in this most important aspect…

For example, in last couple years, my maximum incremental money had gone into ITC and it has been doing really well in this bear market (if it is a bear market). My current incremental money is going in Retail & Consumer durables and I am confident it should do well few years down the line…however what next? If I do not sell them at opportune time, over very long term, the incremental money will generate Index returns, at best!

So, as long as I have incremental money, I should be able to beat Index…the day I don’t have for any reason or do not want to put in incremental money…to beat Index, I would have to depend on money rotation…and here I should be an expert as there are double the transactions to go wrong…Hope my point is clear…

Disc: Invested & Biased. Not a buy/sell recommendation. Post only for academic purposes and I can be wrong in all my assessments

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  1. freeing up time by investing in passive index funds and Incremental money in terms of salary and business profits from active vocation are directly related. If one has fixed capital , lets say of 1 crore , then no matter if one earns a higher CAGR of even 20 %, there is always a substantial upper cap to where his corpus will reach.Its not going to be 100 crores in 15-20 years. But if one gives focused attention to his/her active profession, there is very high chance that he may contribute to his corpus by substantial amount and hence even lower rate of compounding will also increase his corpus to greater amount.

  2. Comparison of returns of actively held portfolio and Index funds, is practically not possible due to many factors. Active stocks entry and exits cant be exactly matched to Index funds. Elimination of dud stocks where fundamentals have gone for toss, is infrequent occurrence.If you are investing carefully, then chances of “Yes Bank” and “Satyam” happening is may be in a decade. But in Index funds, every six months, some companies will be deleted and , new will be added. Also their weights will be changed arbritrarily. Also your own financial goals, Financial situation, Personal needs will also affect the cash inflow as well as outflow, thus rendering comparison impossible.

  3. Most important is are you really passionate about learning new things across bandwidth? Most people are not very keen on understanding business models and reading financials. Even in active investors, many are satisfied to just take a birds view of in general happenings of company and not interested in greater details of company financials. For then if overall direction is on tract, they keep on holding positions.

  4. Most of the positive factors associated with Indexing are already covered in Active long term portfolio :
    a) Low cost…If you are holding stocks for long term…cost is way lower than even index funds. You are not paying any fund management charges to anybody. You are the Fund manager.
    b) No Tax …Since no frequent selling, there is no incidence of taxes, Even long Term taxes can be avoided with tactical exits. (I m not talking of Tax harvesting)
    c) If companies are of coffee can type, then no in-depth and constant monitoring required. Few hours per quarter may be sufficient.

  5. An investor like us, who keep on investing periodically from incremental money from profession or salary…is perennially making his portfolio. His portfolio never gets completed…So one just cant say that now its complete and lets see the CAGR of portfolio…His portfolio is like a big sea, where incremental investments of different rivers keep on adding periodically. It never stops…May be for salaried class, it may stop at age 60…for professionals age 65 to 70…

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Capital Markets are called “Capital” Markets for a reason. Our Invested capital matters most than any CAGR or Stock picking…

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This is a good point which many young investors should note

Agree, one of most important aspect to continue the learning process

Can you pls elaborate on this point what exactly you mean by tactical exits in context of tax and also tax harvesting?

There maybe cases wherein for personal reasons or targets a person may change profession or turn to being self employed/entrepreneur where his/her current income might reduce substantially leaving very little or no surplus for incremental additions…I am aware of such cases in my circle who have taken this plunge of leaving a regular income professional well paid job to being self employed with substantially lower income…

And add to it, if a person has the confidence of generating better returns without incremental money, that would give a good cushion to any new venture he/she might undertake…

There are some good examples in this forum as well like @hitesh2710 sir and others who have left high paying existing career to either start something on their own or full time investing because they are confident enough to generate returns even without incremental money from any regular income…I have seen Hitesh sir master the art of sector rotation, in essence, rotation of existing money to generate substantial return on existing portfolio… which I feel is the true test of an Investor…and is something I need to even start to test waters of…

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Tax harvesting is done by many investors now a days…
Long term capital gain tax is for stocks held for more than 1 year. And over the long term, due to compounding this capital gains amount to very large corpus and when it is withdrawn , a huge capital Gain tax incurr. To avoid this huge long term capital gain tax, what these people do under tax harvesting is…whenever the portfolio completes 366 days and eligible for long term capital gain tax, then sell the whole portfolio and incur capital gain and buy the same whole portfolio the next day. This way , they save on compounded long term capital gain taxes and instead they pay taxes every year on limited long term capital gains. But in this tax harvesting, then incur transaction costs and STT etc.

In my method of tactical selling, what I have decided is, in my life , i never have to sell the whole portfolio in one go and incur very high capital gain tax. What I have decided is, as and when I need money for my expenditure, I would withdraw only that much , thus limiting the capital Gain Tax.
as J. Collins say…you can withdraw just 4 % of your portfolio for your expenditure annually. For example…If you have 1 cr portfolio, you can withdraw 4 lakhs every year and pay long term capital gain taxes only on withdrawal o f that amount…So no need to selling and again buying every year for tax harvesting…Keeping it simple under this “Simple Investing” thread… :grinning:

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I thought tax harvesting is if i have profit on one stock and loss on one stock i will sell both to pay less or no tax. Of course one would have to keep in mind short and long term profit and losses and adjust them accordingly.

Cheers

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This is also one way but not for avoiding long term capital gains. Lets say you are holding 15 stocks from last 5 years, and each stock is in sizable long term capital gains and there is no loss on any stock…Then your strategy will not be helpful as there is no loss to adjust with gain. In this case , to mitigate long term taxes, you can sell the whole portfolio and purchase it again after 1 or 2 days. So from tax point of view, it will be considered as fresh start…

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Sharing some portfolio updates to get others thoughts on stocks, sectors & allocations. Portfolio is down 11.5% from its Oct 21 peak.

Top 15 Picks - 75% of Portfolio

Company Allocation Percentage
Tata Consumer 14
ITC 9
Marico 8
Pidilite 7.5
HDFC Life 6.5
Godrej Consumer 5.5
Trent 4
United Spirits 3.5
Dabur 3
Avenue Supermarts 2.5
Asian Paint 2.5
Nestle 2.5
SBI Life 2.5
Britannia 2
Voltas 2

Potential Core - 25%

Company Allocation Percentage
MNC Pack (United Breweries, Agro Tech Foods, HUL, Hitachi Energy, P&G Hygiene, 3M India) 10.5
IT (Tata Elxsi, LTTS, LTI, OFSS) 6.5
MNC Appliances (Whirlpool & Johnson Controls Hitachi AC)) 3.5
QSR Pack 2.5
Hope Bets (Nykaa & Spencer Retail) 2

Disc: Invested & Biased. Not a buy/sell recommendation. Post only for academic purposes and learning. I can be wrong in all my assessments. Not eligible to give any advice and myself still learning.

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