ValuePickr Forum

VijayKiran (VK) Long Term Portfolio Mistakes & Learnings

Thanks for answering. You are owning few gems for really long time :slight_smile:

How to calculate RRR Reward-Risk Ratio? - I googled, but it seems to be widely used in trading. Trying to understand how you use it for long term investments. I personally use XIRR to compare my MF returns, IND stock returns, US stock returns with benchmarks. But it don’t account the risk I’m taking as yours.

3 Likes

@sivaramtvl I appreciate your keenness and attention to detail. I would recommend you to read a book Stock for the long run by Jermey Siegel. He explained the RRR concepts. I took that understanding from him. He applied that on individual stocks for selection. I am applying the concepts at PF level to monitor my RRR and hence initiating Risk management when required as per my investment strategy.

To simplify let me explain what I do. I defined RRR for my PF = (Average Return/ Standard deviation) over a period of time being monitored closely i.e. monthly, quarterly, yearly basis.

Illustration 1:- Please refer my first post above.
For date ending 09/Apr/2020 (from Nov 2018)
a) RRR for Sensex = 10.87 (=108.7/10)
b) RRR for PF = 16.37 (=114.59/7)

Illustration 2:- Please refer my another post above.
For date ending 28/Aug/2020 (from Nov 2018)
a) RRR for Sensex = 9.99 (=105.17/10.52)
b) RRR for PF = 17.65 (=114.26/6.47)

If you compare the above illustrations, the PF RRR has been improved i.e. reward per unit of risk has improved. But that is not the point. Reward can be improved significantly by having more allocation to equity but so is the increment in Risk as well with more equity allocation. IMO, balance approach would help me sail well by protecting the PF downside with proper Debt: Equity allocation as per my current Risk profile. I greyed my hair too early by chasing return :slight_smile: as a novice and amateur investor. Now I stand with important life time savings and therefore do not want to take unnecessary risk.

Hope this helps. Happy investing.

VK

3 Likes

That’s a very nice way you put up the concept. Thanks. I have one point, don’t you think that the incremental risk with equity depends on the type of equity you hold? For eg. I see you hold RIL, TCS, ITC since long and these solid businesses over long term can be safer than many debts? PPF, EPF and NPS are backed by government but other than these all other debts are risky. I agree chances are less for capital to erode in debt and some may point out that even ITC is down 40% with capital eroded over long term…5-7 years…but is that not a good time to add more, which you already did. My idea is not to discuss ITC or any stock specific but the concept that equity is risky…does it not depends if you hold large chunk in a Colgate, HUL or any other risky momentum plays? And if you hold such solid plays, do you still need significant debt? Thanks

1 Like

@Investor_No_1
Wow! what a question? A great investor dilemma as always.

I will try to address that mental conflict through my own understanding and experiences.

(A). Undoubtedly equity class generate much better return than debt over a long period of time say 15 to 20 years onward. This is the motherhood statement and can’t be challenged so easily in all probability.

But let us deep dive more to extract the real weaknesses.

  • a) For an equity investment I mean direct stock investment, a beginner had almost around 10,000 companies to chose and invest whereas for a beginner to invest in Debt instrument he has 8-10 options available except debt funds. (Please note that IMO Debt funds are more riskier than equities.)

  • b) Now the probability that beginner is able to choose good stocks I mean consistent compounder or multi-bagger or real growth companies from the basket of 10,000 companies is remotely small and in my experience would be less than 10%. So chances that a beginner will spoil his capital is very high and make losses 90% of the time. And by the time he realizes this he would have wasted 7 to 10 years of his precious investing time which would have significantly dented his long term annualized return.

His long term compounding return including his follies would be in the range of 1 to 5% which will put his head in permanent regret and remorse. And then in order to compensate his loss/return he would take bigger risks inviting more troubles for himself. Therefore you would have heard that bulls make money, bears make money but pigs get slaughtered. And the majority of Retail investors fall into the category of pigs :frowning: as far as stock returns are concerned.

Anecdotal story for reference: Once upon a time during early years of 2000’s the stocks like ONGC was such a hot potato with great business and excellent dividend yield that it had attracted Buffet to make investment in India when GOI brought IPO and further FPO, OFS blah blah. And later as on today ONGC turned out to be a great wealth destroyer of all time having experienced it first hand :). My investment in ONGC was six times of annual fresher salary of that time! I am amazed to see how many fund houses still holding such laggards at the expense of hard earned money of innocent investors.

  • c) Now lets take a scenario a beginner makes a choice of Debt investment like PPF then in 8 to 10 years he would have made consistent return of 7-8% plus tax saving of 30% if falls under high tax bracket. And his capital would have swollen at least two times without any iota of risk.

So for me a beginner must start with Debt allocation before jumping or graduating to equity. For equity investment one need to develop sound study habits, deeper research and significant time able to invest in reading, researching, analyzing various stocks, sectors and general economy.

(B). Personally for me Debt allocation is important because I foresee my key expenditure of large amount in coming years of 3, 5, 7 years so I can’t take unnecessary risks of putting those sums in equity. So it all depends upon individual situation, risk profile, need and financial goals. If you don’t need money back from equity for say next 40 years than surely one can put all his money in equity. But the big question is where (which stocks or basket of stocks) to put money in equities for such a long term?

I am sharing my understanding, learning and experiences and I have every right to be proven wrong. But one thing I realized that equity investing is not that plain vanilla exercise that any Tom, Dick and Harry can do and make fortune out of it in quick succession as propounded by govt., media and its agents. It’s a tough and very complicated exercise for novice and beginners. I advise extreme caution to beginners in direct stock investment without proper and systematic study.

Hope this helps. Happy investing.

VK

12 Likes

Your portfolio approach and thread is very informative. Thanks for sharing…

I have a minor nitpick in your comparison excel - Are you comparing against Sensex or Sensex TRI? If it is the former, then you are ignoring the dividends given by Sensex companies… Over time, this tends to compound…

One other way to track is to compare against a ETF. That would include the dividends…

2 Likes

Thanks for sharing your experience in details. If you were significant investor in ONGC back in 2000 then you are lot experienced than many else in this forum… As a matter of fact one of my own first investment in equities was energy/resources companies…RIL and ONGC somewhere back in 2010. Then I was really lucky that one of my small investment based on brokerage report went bankrupt and I lost full capital. That was the turning point and after lot self analysis of temperament as investor and companies for long term, realized there is nothing better than well managed FMCG firms…look at 100 year charts of top US FMCG firms and you will get the answer. I have gradually added Retail and life insurance to that list with caution…but if any investor needs to build a coffee can for really long term, listed FMCG firms are a blessing, specially on dips. I would chose them over any debt other than government backed EPF/PPF in terms of safety as well.
Disc. Not a buy/sell recommendation. Invested almost 65% portfolio in FMCG firms hence biased

2 Likes

@Isubs

Thanks for your suggestion.

Actually, I am comparing against Sensex only. I record my dividends separately and in last many years it was around 1.2% to 1.6%. And Sensex dividends too have similar returns, therefore, it doesn’t impact the overall return understanding in a significant way.

1 Like

@Investor_No_1 Great. I reckon your view and completely agree on FMCG line of thinking and investing. In fact if you can refer my second post above I do have formulated the same rule on FMCG style of investing.

Only suggestion at this point would be to keep monitoring the sectoral concentration risks going forward. Every ingredients has its own importance in full course meal :slight_smile:

1 Like

Great, yes I agree with concentration risk however my take is little different here. Even if you know how to evaluate, still FMCG are best long term bets. Every FMCG company shares I have are way different in business, are at different cross roads, risk profiles, dividend, strategy and segment growth levels. There is very less comparison and one would know that and can play that only if we can evaluate businesses and hence concentrate in the larger segment. Thanks

2 Likes

Also since we discussing FMCG, wanted to add that some businesses, although not strictly FMCG but have certain dynamics and strengths similar to FMCG…like say the bazaar segment of Pidilite, premium Scotch brands of United Spirits or even beer from United Breweries, women hygiene products of P&G hygiene, self medication products of P&G Health etc. All of these have varying degrees of growth and their own risk profiles. Also, a Tata Consumer is a next generation growth machine, HUL is a stable mammoth, Agro tech foods is at cusp of a transformation, ITC is a business restructuring story, nestle is undisputed market leader in some niche segments, Marico, Godrej, Dabur…I can see all different stories here with their own paths and most of them would reward in long term with increasing dividends yoy. Imagine I did not mention the snacking king Britannia and a promoter level turnaround (pledge and debt reduction) of Emami with a Zandu ayurveda story.

6 Likes

PF_Vs_Sensex_CompareTool_v2.0

Friends, many people has messaged and emailed me in person and wanted to know the detail working and calculation for PF Vs Sensex compare tool which I am using.

I am sharing my approach in excel for common reference of those enthusiast who may need it. I know that it may not be the perfect one but at the moment it is serving my purpose. Suggestions are always welcomed.

PF_Vs_Sensex_CompareTool_v2.0

Happy Investing!

VK

1 Like

Note : Sorry to ask this question, please bare with me if the question is very basic in nature.

The formulae you have given for RRR = (Average Return/ Standard deviation)

Can you please give break of the values ? ( I mean how did you get the below numbers ? )

Illustration 1:-
For date ending 09/Apr/2020 (from Nov 2018)
a) RRR for Sensex = 10.87 (=108.7/10)
b) RRR for PF = 16.37 (=114.59/7)

From 10 Nov 2018 - 9 Apr 2020 - Duration is 516 days
How did you get the value of 108.7 ?
Why are you dividing it by 10 ?

Similarly for the Illustration 2 as well, not clear from did you get those numbers ( I tried to check the historical price on those said dates and then take opening value on 10 nov and closing value on 9 Apr, but I am unable to derive anything )

I will read the book Stock for the long run by Jermey Siegel :slight_smile:

  • KIndest

Hi Vijay_Kiran, Thanks for sharing your tool.

Me too have a basic question. Do you note down your PF value everyday manually or is there any script does the job for you?

Thanks!!

@Rafi_Syed I learned many things at this forum in last 6-7 months and very much inspired from Donald and Hitesh Bhai. And I am a firm believer in giving back to the community/society concept in whatever little way I can be help to anyone.

In management they say “You can’t manage if you don’t measure” :slight_smile:

Please take time to read my post#1. I started the active management of my PF since Nov 2018 and over a period of time it evolved to a meaningful way which is giving me peace of mind and satisfaction. In the process I developed lots of tool in order to give me insight and action oriented themes around my PF management.

The answer to your questions are as follows:

  • a) Specifically, all the data and its statistics are of my PF and from my tracking tool. Therefore if you try to critically analyze the veracity of the data there are chances that your findings will be not be matching the presented data of mine. For example, you calculated the difference of two dates and got the duration as 516 days but in my tracking although I started from Nov 2018 but initially I was not recording on daily basis and so there was gap of couple of months in the recorded value of both Sensex and PF. But that has not affected the analysis in any materiel way because I am doing comparative analysis on relative basis and not on absolute basis.

  • b) Your asked numbers (108.7 and 10) are nothing but average and standard deviation of Sensex from my tracking tool as I noted specifically on different occasions with varying interval. As my conviction developed on my analysis, the variation in recording data reduced drastically and now it become routine on a daily basis at the end of the day.

image

Please check the numbers at the given link to get the clarity which was already shared in couple of posts above.
VK_PF_Vs_Sensex_CompareTool_v1.0

Lastly don’t forget to read the book as you promised :slight_smile:

Hope this helps. Happy investing.

VK

2 Likes

@paran_raja yes I note down the pf value manually.

Trendlyne is giving functionality to get return % on portfolio ie as XIRR,if we fill in data of stock sold,quantity,date and price.
Will this be easier or shud we maintain daily performance of pf,and use Xcel.?

If we have to shortlist 2 fmcg stock,how should we go about it?

@ANXIOUSINVESTOR this is not a buy or sell recommendation. If I were to select two FMCG Companies from my pf then I would prefer Nestle and Brittania for long term bets.

Disc- invested in above names.

No doubt,these 2 are very good companies.
I wanted to know what should be criteria to shortlist amongst FMCG companies and the thought process.

@ANXIOUSINVESTOR
For goodness, the respective thread on these companies covers most of the aspect. IMO, some of the criteria which needs to be considered for these companies are longevity of business, its Return on Equity on a consistent basis, long term shareholder return in last couple of decades, its moat vis-a-vis competitors, ability to generate good free cash flow etc.