The harsh portfolio!

[harsh.beria93]

Hi Srini,

Thank you for your kind words.

@srini_siva

1)How do you stay clear of those hot stocks (stocks with stories going round and round and prices move up and up till the sanity returns). Eg. API stocks after covid telling India is going to eat China’s market, Auto Tier 2 stocks which are sold as EV plays, Commodity chemical stocks sold as once in a lifetime capex+export substitution stories etc.,

I will invert the question and ask if you know of any investor who has consistently outperformed the market by buying whats flavor of the season? Most successful investors I know of are either very early in catching the growth cycle or have made money by investing through despair. You dont need to answer me, but I will request you to think deeply about this.

@srini_siva

2)I can see low P/E is a key criteria in your stock selection. Do you have any absolute value only below which you’ll buy or any range?

For well discovered companies (like ITC, HDFC bank, etc.), I see what valuation bands a company has traded in its past and try to buy towards the lower end of the band (more details below)

Cyclical investing - case studies

For cyclicals, the bet is on mean reversion. So plotting a fundamental variable which is mean reverting in nature solves the problem (in most cases). Here is the P/B value charts for NALCO and Sobha over the last 10 years. [national-aluminium-compa] For nalco, a clear buy is ~0.6x P/B and sell is ~2x P/B. For Sobha, buy is below 1x P/B and sell is at 2x P/B. The length between this valuation gap determines the IRR. What I mean is if it takes 5-years to go from 1x to 2x, IRR is 15% from re-rat…

For undiscovered stocks or very small companies, I try to buy at <10x normalized earnings. I almost never pay >15x for small companies, unless I am very confident of the business quality and growth profile.

@srini_siva

3)50% in cyclicals and how do you try to stay on top of the cycle. I understand you intend to get in lower end of the cycle and sell at peak. But how do you track? Do you have a source tracker of exports, Commodity prices, Chemical prices etc., How often do you check? Any entry and exit criteria?

I am often not on top of the business or the market cycle. When I am buying, its almost guaranteed that there will be few brokerage reports and most of my work focuses on quality of balance sheet (rather than profit & loss statement). During upcycle, there is a lot of coverage around the stock and valuations are much higher than long term averages. Although, exiting just based on valuations implies that I will miss some part of the upside, its generally not a problem as there are often ample available opportunities. Over the past few years I have worked a lot on improving my selling skills (see some examples below).

https://twitter.com/theHarshFolio/status/1582363366986698754?s=20
https://twitter.com/theHarshFolio/status/1586349637207613440?s=20
https://twitter.com/theHarshFolio/status/1582392700451819520?s=20
https://twitter.com/theHarshFolio/status/1582383230413524992?s=20
https://twitter.com/theHarshFolio/status/1582388469359579138?s=20
https://twitter.com/theHarshFolio/status/1582382064573513728?s=20
https://twitter.com/theHarshFolio/status/1582382666531622912?s=20

Hope its of some use. Thanks for asking