Towards a Capital Allocation Framework!

@ajay81 what I shared above is the complete report from Kuvera.

Good piece.

There is a belief in the market that success comes from concentration but ideally it should be the opposite - concentration is a function of success. Success is achieved by giving time to a portfolio. Investing time in a diversified portfolio of quality companies would automatically result in ballooning of portfolio with concentration in select holdings.

More than success from concentration, it is important to understand process of concentration. Success will follow. All the best!

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Prof. Sanjay Bakshi’s presentation on ergodicity is very relevant to the topic

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Great discussion.
I have question related portfolio allocations. I thought of creating different thread, but found this thread.

Problem Definition-
Suppose I have cash, but I do not see an opportunity to invest.

  • Shall I wait for the opportunity and remain in cash or keep fully invested.?

    Example: Suppose I have Rs 100 of the portfolio. I have invested 70 of it in different stock. Additionally, at any point, I want to have cash of 10 available to deal with any unforeseen situation, including buying additional stock in case of a sharp correction. This leaves cash of Rs 20 with me.

    I am really keen to invest in 20, but the current market does not offer me the opportunity. My below question, how should I utilise 20?.

After debating the above question, I thought the following two strategies make sense. Here are my points for both the strategies.

Options 1:

  • Keep fully invested or all most fully invested. (e.g Invest Rs 20, out of 100- all/most of the time)
    Here you have already invested (e.g 70) with companies you have conviction, and you do not wish to increase the exposure to existing holding for n-number reasons.
  • So essentially you are seeking new investment, but you are not finding investable opportunities.

Decide on an amount which you would want to preserve e.g 20

  1. Invest in a solid business which can withstand major corrections.
    Example- HDFC, Bajaj Finance, ITC, Asian Paints

Stock Selection Criteria

  • Strong downside protection. The probability of going lower is very less.

  • Downside protection is the most important criteria.

  • The stocks shall be from different sectors.

  • Shall not correct heavily.

  • Stocks shall not co-related.

  • Spread investment across a set of stocks (e.g two-three stocks or more)

  • The stock shall not come from a sector which is attracting lots of attention at the moment (e.g Pharma or Chemical sector as on today).


  • You are invested the market all the time.
  • You are able to participate in the higher market (which is most of the time over the long term).
  • As you are not buying a hot sector or hot, you are investing in a comparatively safer stock.
  • In theory, if you take longer to find a stock, you can still in the market and avoid Fear of missing out (FOMO).

Disadvantage/Additional thoughts

  • One may ask - The stock may correct when you need the money to invest in your high conviction idea the most?
    Rational - If the overall market goes down, the key stock will also go down. However, if HDFC/Asian Paint falls by 10%, it is likely that stock in the other sector may fall even more. So in a sense, your stock has fallen less. In case you want to buy other investments, it is relatively better than before.
  • Example. Assume HDFC is 2800 today and Piramal is at 1700 (12 Feb 2021). Today each HDFC will give you 1.65 Piramal Enterprise (PEL). If the market correct (take an example of Covid) HDFC corrected to 1500, but PEL corrected to 700. So at the bottom of extreme pessimism, one HDFC was giving 2.1 PEL shares.
  • You are always invested.

I remember Bill Ackman mention this in one of his interviews. However, I cannot find a source now.

Option 2- Wait for an opportunity to invest.

  • Wait for the opportunity.
  • Invest as if you are investing for the long term.
  • Keep in cash until you find opportunity (20 in cash)


  • Money is ready to invest when the opportunity is presented.
  • Do not have to rely on selling other stock before buying new stocks.


  • When faced with the situation I keep looking for a market correction. It is a shallow correction (5 to 20%) you invest in stocks. However, if the deep correction (e.g 2008 like or Covid) correction, emotions does not allow to invest.
  • I keep looking for factors that can drive the market down. When faced with this kind of situation, I drifted towards listening/hearing people who are sceptical about the market going high. Being sceptical is good, but there is some expert who is pessimistic most of the time. I have observed that e listening to an economist is interesting but takes up a considerable amount of time, which I could have utilised for much better use.

Additionally, in such situations, I tend to remind myself of Warren Buffet, and Charlie Munger advise.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important.

Additionally, when asked (to Warren & Charley) how much time they spent in a year listening to macro forecast, they answer something in the line of 90 seconds in a year.

Overall, I have a been in the second camp, waiting for the opportunity to be available before deploying cash. However, I am challenging myself if that was the right strategy? Are they are any better strategy?

When I hear Ramdeo Agarwaral or Rakesh J they always say they are fully invested. No doubt they are in different league , but being fully invested could be a good advise for individual investor too.

What is community experience and how do they tackle similar situation?
Any comments/views/suggestions welcome.


I used to overthink this a lot. While we all have to find our own right answer, I hope this helps:

This is a view I subscribe to and follow.

""Temporary” in temporary parking place could last as much as 5 years. Do no fret
over poor nominal returns you get from fixed income investments and negative real
returns after counting inflation during those long years. The purpose of this money is
not to make money. The purpose of this money is to be available when a fantastic
opportunity arise"


The world is a shade of grey. Many a time most debates are reduced to black and white opinions - diversification Vs concentration, high quality Vs unproven quality, buy and hold Vs momentum based churning.

Anyone not in a position where one has to stick to a stand and build reputation/business based on that approach has an inherent advantage. Why not go with a hybrid model? Problem is that we are told by media/gurus to find one philosophy and stick with it. Once again this is a narrative that we don’t need to fall for as retail/non-professional investors.

What do I mean? My portfolio has concentration and diversification at the same time. 20% of my net worth in one stock but 40% allocation to fixed income and the remaining 40% spread across 15-20 well researched stocks. Not easy to slot this into a specific narrative but who cares, it works well for me.

Some people aren’t comfortable with volatility by nature, concentration doesn’t work for them unless they have some operational control on the business too. Speak to promoters who have 70% of their net worth in their own listed business, they don’t see that exposure as equity since they have operational control. The same Jeff Bezos would have a different allocation pattern if he weren’t running the show at Amazon.

Capital allocation should ideally be a function of who you are and how you see money. Those who are already wealthy often trade alpha for peace of mind, the incremental 4-5% return does not move the needle for them. But those who have aspirations of doubling their net worth every 3 years will try to squeeze out every additional 1% at every opportunity and also have a high equity allocation.

Over the past 6 months I have allocated more to FD than to equity, but that is an outcome of my personal utility function that seeks to balance out my life. I have both investment income and operating income dependent on how the market performs, the world looks different to me though I’ve always had 60%+ in equities over the past 5 years (March 2020 included).

A general rule that works well is that higher your alpha generation capability, lesser can be your equity allocation. If all you do are index funds/ETF that can deliver 12-14% over the medium term, you will most likely need higher equity allocation to create wealth. However if you can generate a return of 25%+ through stock picking, 50% might suffice during most times. When the bottom falls off the market, you can allocate more money and make more return than someone who is sitting at 60% equity allocation.

The average user on this forum should think deeper and not go by the superficial gyan peddled by media. Media likes to simplify the message so that even a dart throwing monkey can take away a few basic rules. The average user here is way smarter than that.

Wealth management is still in the primitive stage in India, building asset allocation models is reduced to a few things like -

Age of the person
Allocation to equity, fixed income, real estate and gold
Liability and event/goal based planning

The most important variable (behavioral and attitudinal profile of the person towards money) cannot be quantified, this can only be evaluated through a comprehensive exercise by a wealth manager who has both the IQ and the experience to be able to do so. The average age of the wealth manager in India is 35 years and they have less than 20% of their own money invested in equities. Go figure how much of an advisor he/she can be. Some successful wealth managers are exceptionally dumb people, they can talk their way out of anything but cannot make sense of financial statements.

The primary goal of any capital allocation framework should be that you always live to fight another day even if the market falls 50% and stays there for 3 years. Once this is ensured the rest of the steps become subjective based on a variety of factors. 40% allocation to fixed income works differently at a net worth of 10 Cr than it does at a net worth of 50 lakh.


Brilliant Post…Just few queries…
In case of 40% Fixed Income allocation, what are your favourite Fixed Income Products?
also what are your views about Commercial Real Estate investment as a alternate Income Generation avenue? Can it be considered good to hedge your anticipated 50% fall in markets? Kindly Guide.