Prudent Investor's Portfolio

Alchemist

Administrator
Staff member
The current crash can be looked into to focus on companies with zero debt/strong $ earnings primarily Pharma names.
Yes, that would be a good way to pick stocks, especially for those investors who are not well versed with analysis of financial statements.

There could be some exceptions like financial companies and power generating companies, which have high debt:equity ratio by design.

As long as their assets remain good, their cash flows are steady and thus these companies can handle large debt compared to their equity.
 
This thread is a good chronicle of the learning journey for Direct equity investments.

I started benchmarking my portfolio with the NAV based approach since 31.03.2010, determined that if I am unable to beat the benchmark would quit DE and move to MF.

Till 2013, I was trying too many things and not following a process and learning from past mistakes and the results suffered. However the sooner you move to a disciplined process, wealth creation through equities is possible and how!

The last 4 years have made me realize it is not about stock selection but allocation and temperament that makes all the difference. With little bit of discipline, it is possible for retail investors to do very good on their own.

Portfolio has returned 10X over Nifty/Sensex returns during the same period, with added cost savings of not investing in MFs.
 
Golden words, worth framing.

:top:
I would add that please include "Stock Selection" and "Timing" too. Timing means the price you enter the stock at.

Reason to support the above:

# Once you are comfortable with the price you enter, you will have much more confidence in holding it even when it goes south. And probability of being right is much higher with the right selection of stock.
 
I would add that please include "Stock Selection" and "Timing" too. Timing means the price you enter the stock at.

Reason to support the above:

# Once you are comfortable with the price you enter, you will have much more confidence in holding it even when it goes south. And probability of being right is much higher with the right selection of stock.
Price anchoring is very harmful. It is essential to keep adding more of the same stock - upward averaging - to create a meaningful position size.

The next HDFC Bank is ............HDFC Bank. If you keep adding more of the best, it will only help your cause.

Stock selection is important, but without the right temperment you will itch to book profits in the first 10-20-50% where instead you should be adding more.

Again timing is difficult, but adequate margin of safety depends on knowing more, so your knowledge of the stock might have helped determine 100 as the safe price - with more reading and interaction you will certainly develop confidence and more intricacies - which when factored in make 150 a safe buy price for the long horizon and you again add at 150 instead of booking out 50% profits.

Wealth creation can only happen if you want to participate and grow with good business - and not looking for 'stocks' to buy and sell :).
 
Wealth creation can only happen if you want to participate and grow with good business - and not looking for 'stocks' to buy and sell :).
I am all in for the above line. Two things which matter and what works for me is:
1) Right Business i.e. Quality company which does have some moat.
2) Right Price i.e. basically cheap valuation if I could say so. :)

And finding those when market is trading @ PE 23-24 is very tough if not impossible. So even though I know HDFC is having good moat and good player in its segment, I find it very difficult to even look at it @ this price level. Not a very good bet for me.
 
I am all in for the above line. Two things which matter and what works for me is:
1) Right Business i.e. Quality company which does have some moat.
2) Right Price i.e. basically cheap valuation if I could say so. :)

And finding those when market is trading @ PE 23-24 is very tough if not impossible. So even though I know HDFC is having good moat and good player in its segment, I find it very difficult to even look at it @ this price level. Not a very good bet for me.
I agree, and disagree on both :)

1) Moat is an over used and over abused word. Companies develop and protect a moat and some companies lose it over time. So the right thing to focus on is business strategy and how enduring the moat is.

2) All depends on margin of safety and valuation. Ultimately your returns from a stock will be a proxy of the ROE. So if you buy a 10% ROE stock dirt cheap vs a 25% ROE stock at moderate valuations and hold both for 10-15 years, your returns would be much superior from the 2nd - despite the fact that didn't buy it 'cheap'. The margin of safety is here from the business quality and superior ROE.

The composition of Nifty has changed from Investment Led to Financials Led. So the base PE of the current Nifty is much higher. So don't get into this trap of expensive looking Nifty and lose out on quality wealth creation.

Check this link for more info on this.
 
I agree, and disagree on both :)

1) Moat is an over used and over abused word. Companies develop and protect a moat and some companies lose it over time. So the right thing to focus on is business strategy and how enduring the moat is.

2) All depends on margin of safety and valuation. Ultimately your returns from a stock will be a proxy of the ROE. So if you buy a 10% ROE stock dirt cheap vs a 25% ROE stock at moderate valuations and hold both for 10-15 years, your returns would be much superior from the 2nd - despite the fact that didn't buy it 'cheap'. The margin of safety is here from the business quality and superior ROE.

The composition of Nifty has changed from Investment Led to Financials Led. So the base PE of the current Nifty is much higher. So don't get into this trap of expensive looking Nifty and lose out on quality wealth creation.

Check this link for more info on this.
Interesting thoughts. Agree on your both points. Moat never remains constant. Either it gets contracted over time or it gets widen with the right strategy. So it makes perfect sense to even look at what their management is looking for future and how good they are.

On your 2nd point, What would be your thumb rule to pick up the undervalued gem from the market?

I checked the link you posted. It certainly helps to understand why the Nifty 50 index is a right index to compare. I just checked what happened with Nifty 500 and the story actually looks more intense. The Nifty 500 index doesn't change much YoY as compare to Nifty 50. Whats your thought on this?
 

Alchemist

Administrator
Staff member
2) All depends on margin of safety and valuation. Ultimately your returns from a stock will be a proxy of the ROE.
That may not be the case always.

A good ROE is "good" only if the business has room for expansion. If the business can't expand, the compounding effect of ROE is lost.

Castrol is a classic example of this.

Its ROE is one of the highest among all NSE-listed companies.

However, the company is unable to expand. The lubricants market isn't growing fast enough and from what I have observed, it is losing market share to companies like Shell.

There is little use of all the cash that the company is generating. Incremental spends on marketing are unlikely to generate any significant returns.

As a result the company is generously distributing most of its cash.

The stock has a good dividend yield, but is going nowhere.
 
That may not be the case always.

A good ROE is "good" only if the business has room for expansion. If the business can't expand, the compounding effect of ROE is lost.

Castrol is a classic example of this.

Its ROE is one of the highest among all NSE-listed companies.

However, the company is unable to expand. The lubricants market isn't growing fast enough and from what I have observed, it is losing market share to companies like Shell.

There is little use of all the cash that the company is generating. Incremental spends on marketing are unlikely to generate any significant returns.

As a result the company is generously distributing most of its cash.

The stock has a good dividend yield, but is going nowhere.
Great example. There are two aspects of evaluating any company : Present status i.e. with all their past performance where they are now and Future i.e. Where they will be in 2-5 years...anything beyond I think its a futile exercise.

So the question comes when do we even start looking at the future of any company? i.e. How do we even filter it? Do we have any better tool than seeing the numbers they present?

And next question comes, once filtered, how do we evaluate the future?


PS* In my previous post, please read the line as "...I checked the link you posted. It certainly helps to understand why the Nifty 50 index is NOT a right index to compare."
 
On your 2nd point, What would be your thumb rule to pick up the undervalued gem from the market?
Frankly speaking there aren't many undervalued gems at this point. Having said that, there aren't lack of decent compounders which will continue to churn superior earnings and are decently valued at this point. So the key is to moderate your return expectations for fresh entries at this point. However that moderate returns would be far superior than other asset classes and beat the benchmark risk free rate.

There are newer opportunities and emerging sectors which might take time to materialize but worth studying at this time. 1) Gambling & Casino business 2) Securities business - both Physical and Cyber.


I checked the link you posted. It certainly helps to understand why the Nifty 50 index is a right index to compare. I just checked what happened with Nifty 500 and the story actually looks more intense. The Nifty 500 index doesn't change much YoY as compare to Nifty 50. Whats your thought on this?
Benchmarking is necessary for mutual funds and individual investors when you start the process. Once you are aligned to a process of investing focus should be on absolute returns. The targets would depend on your risk appetite and style of investing. Smaller portfolios needs to focus on capital building - take higher risk and target higher returns; while larger portfolios needs to focus on capital preservation and appreciation.
 
That may not be the case always.

A good ROE is "good" only if the business has room for expansion. If the business can't expand, the compounding effect of ROE is lost.
Not always. This depends on how the business is protecting the brand moat. So for example in consumables like castrol, even if they can maintain their market share incremental ROEs wil be huge. The absolute ROE might not reflect the true picture as companies might be holding cash/investments.
 
So the question comes when do we even start looking at the future of any company? i.e. How do we even filter it? Do we have any better tool than seeing the numbers they present?

And next question comes, once filtered, how do we evaluate the future?
Start using screener https://www.screener.in/

The key to look into aspects like Capex completed. Current CWIP would be very small and Net Block would be significantly large. For such companies, the Op Cash flow will be much higher than reported earnings due to heavy depreciation. As the capacity utilization increases, the operating leverage kicks in and helps in wealth creation. Check most of the cement companies for example.

The future evaluation would broadly depend on the following :

  • Management quality and Bandwidth
  • Capital allocation - ROE, ROIC from the business
  • Debt position
  • Expansion plan
  • Working capital management
  • Market share and Size of opportunity
  • Competition Landscape
  • Govt policies
 
The last 4 years have made me realize it is not about stock selection but allocation and temperament that makes all the difference. With little bit of discipline, it is possible for retail investors to do very good on their own.

Portfolio has returned 10X over Nifty/Sensex returns during the same period, with added cost savings of not investing in MFs.
Nifty has returned around 60% in the past 4 years (from around 5600 in April 2013 to 9300 in April 2017).

Your portfolio returned 600% as in 10X times over Nifty in the same period?
 
Nifty has returned around 60% in the past 4 years (from around 5600 in April 2013 to 9300 in April 2017).

Your portfolio returned 600% as in 10X times over Nifty in the same period?
I use the NAV based approach to measure portfolio, refer earlier posts in the thread. The PF NAV has increased by that margin, during the said period.

Not absolute returns, since capital was invested along the way too between 2013-2017.
 
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