VP CHINTAN BAITHAK GOA 2015: Gaurav Sud: INVESTMENT JOURNEY/PHILOSOPHY

@arunsg,

In my case the concept of mean reversion is driven by the fact, that if a market or asset class has outperformed, then over time it will tend to revert. This is more applicable to the index than an a stock & as Taleb pointed out purely driven by probability scenarios.

For stocks there may be a case of serious rerating because the business qualities are discovered and the market identifies it as an above average business with a good management eg Ajanta Pharma, Eicher Motors. Now as you suggested that if a stock like Lupin has grown at 30% over the years, it could also be that the earning may also have compounded 25-30% over the years. Then there is no reason to be alarmed and sell. However over a period of time if a stock you bought at 1 times P/B is now say 10 times P/B, eventhough the PE has increased from say 5 to 25 now, I would tend to be cautious.

The rule I follow of a stock not being allowed to be more than 25% of portfolio is driven by my past experience, where one stock which had hit more than 50% of my portfolio crashed 92% from the peak in 2008 Lehman Crises. Its an event I never want to experience again and hence the rule :smiley:

So to answer you question the mean reversion analysis is more driven by the overall values in the market, rather then the sector or a stock. Also I tend to take money of the table when times are good and tend to invest in the safer categories like Debt, bonds.

5 Likes