2014- Model Portfolio

As promised in the last post, here is my Five stock model portfolio for 2014.

But rather than picking one portfolio, I have picked four different portfolio for four different investment styles.

Value Picks	Low PE	Medium PE	High PE
Nesco - 783	Canfin - 174	Repco - 348	Page - 5164
Selan - 304	RS Soft - 194	Astral - 330	ITC - 322
Piramal - 551	Acrysil - 205	Ajanta P - 946	Nestle - 5297
Noida Toll - 21.5	Avanti - 248	Symphony - 424	Gruh - 256
IL&FS Inv Managers -13	JB Chem - 129	PI Ind- 247	Sun Ph - 568

* stock picks along with recommended price

Value-picks Portfolio has stocks wherein there is a huge asset base supporting the market cap like Nesco has 700 acres of land in Bombay. But there is uncertainty about how that value will be realized. However, I feel, these five have potential of value-unlocking in 2014. Ben Graham & PPFAS Value Fund might well have these picks in their portfolio.

Low PE Portfolio (PE < 10) has stocks which are cheap relative to their current earnings & book value. These five have potential to beat the market in 2014. However, future visibility is low & hence market may not pay very high PE/ PB to these. Who will have these? Don't know... Maybe Howard Marks will have them.

Medium PE Portfolio (PE < 25) has stocks which are growing very fast currently & have good potential to keep doing that in next 2-3 years. These are stocks that have moved from small caps to mid caps in past few years & can become semi-large caps in next few years. Maybe Charlie Munger will have them.

High PE Portfolio (PE > 30) has stocks which are proven great stocks. The Tendulkar, The Kallis of investment world. These are the stocks to buy once market drops 30-40-50%. However, current high PEs makes investors worry whether they are paying too much or not! Stocks which will fall into portfolio of Philip Fisher.

PS- I/ Good investors I know are bullish on all the 20 stocks. I hold some in my portfolio and hence bound to be biased.

Lets see which portfolio performs the best in 2014.

2013- The Year That Was!!!

As 2013 comes to a close, its time to review & analyze the year that is about to end. As 2013 ends, I finish my 3 years in Equity Investing!!!

So how good/bad have I done & how I want to move ahead? Here are my views on Equity Investing-

• Apart from contingency funds & tax saver funds, most of my net worth is in equities & I plan to maintain the same as I believe equity should do better than any other asset class over the long term. I still maintain my views of What, if not Equities? 

• Equities are & will always be volatile; so in optimistic times its better to have cash to keep portfolio Anti-fragile i.e having ability to profit from volatility. How to judge optimism/pessimism? Look at sell-side analysts view. If they seem optimistic, its better to be cautious & when they predict doomsday, just go out & shop. Currently, most are optimistic!! 

• The amount of money I have invested in these three years is much less than the amount of money I plan to invest in the next decade. So, I want bear markets rather than bull markets.

• Its better to buy Good Business than Cheap Business!!! In good businesses, Margin of Safety comes from the earnings growth, the ROCEs, the free cash flows, the increasing dividends and not Price paid. So, now I am OK to pay about 20 PEs provided I expect good growth at good ROEs. Though, still not comfortable enough to pay 40 times earnings for great businesses like Page. 

• Of-course, the best thing is buy a Good Business at a Good Price. How is that possible??????(1) When that good business & its potential is unknown to the market. Ex- Mayur Uni 2 years back. (2) When that good business gets into temporary issues & price falls due to those issues. Ex- VST Tillers last year after a bad Q2. 

• I am in the Diversified Portfolio Camp. I want to limit a position to a maximum of 10% of portfolio value as I want to save myself from Black Swan events as well as Illusion of Control. I neither meet the managements nor talk to customers, suppliers, competitors etc so to get a great deal of confidence to put 25-30% of money on one stock is tough. I am happy with my 10% limit rule till the time I start doing those things.

• I want to achieve 19% CAGR over the long term. Why 19%? Because- (1) 1.19^4= 2. So, portfolio doubles every 4 years at 19% CAGR. (2) Because both God & Guru have nearly similar CAGRs over the long term. See here and here. At 19% CAGR, I believe, I will be able to do better than most mutual funds and most other assets. In the first three years, I have done much better than my target rate. However, as my portfolio grows and as equity markets become less rewarding, I think, my return CAGR will fall. 

• The most hurting mistakes of 2013 are on the Selling side. I have sold a stock which then rallied 50% in the year, sold a stock on seeing margin pressures to see it go up 20% in a quarter, and have a few stocks in my portfolio which I don't know when to sell. So, clearly I need to work on getting selling right.  

• In 2013, my portfolio returned 31% CAGR thanks to some good work, good side-car investments alongside great investors and good movement in small & mid caps. I expect 2014 to be much tougher.

In the next post, I will pick my stock-picks for 2014!!!

HaPpY NeW YeAr 2014!!! 

It Happens Only In Markets!!!

Imagine I buy something from you, then can we both lose in the trade??
I think No because this is a Zero Sum Game... Either you gain or I gain or we both stay same (if Price = Value).

But that's not what happens in Stock Markets!!!

Torrent Pharma decides to buy Indian Branded Formulations Business of Elder Pharma for 2000 crs.
And what Mr. Market does?
It punishes both. Torrent down 4%, Elder down 8%. At one point, both were more than 10% down.
How can both lose in the trade???

Actually both can lose if we involve Tax angle. Elder would receive only 1300 crs (assuming 35% tax). So if intrinsic value of the business is between 1300 & 2000 crs, both will lose. 700 crs goes to tax dept.

However, Torrent Pharma lost more than 900 crs at one point (when down 10%) & Elder lost 70crs. So clearly there is more to it than just the Tax Angle.

Lets think from Torrent's shareholders' perspective. If I am a shareholder, I will think-

1. Oh No!! They are buying other business, means they are not confident of growth from their own business segments. Let me sell.
2. M&As are generally value- destructive. May be this is also the same. Let me get out. 
3. Oh No!! Who will pay for these 2000 crs? This will distort the balance sheet & the company will have to pay the interests also. This will hurt the near term PAT also. Let me sell.

And none of the concerns is illogical.

Lets think from Elder's shareholders' perspective. If I am a shareholder, I will think-

1. Oh No!! I was bullish on that segment only. What's the point of keeping this stock now without that segment?
2. Will I get anything from this sale? The press release hasn't even talked about dividend. So, I guess, nothing is come my way. Lets not keep this.

And none of these concerns is illogical either.

So it makes perfect sense for both to fall after this trade announcement. It happens only in the Markets!!

Behind every trade there is a Buyer and a Seller, and, I think, both can be right due to difference in time frame, access to information, analysis of the information and/or circle of competence.

And this is precisely the reason why equity markets are so volatile and so interesting. In case of perfect information & perfect analysis, stock returns would have just followed earnings growth just like Fixed Deposits.

And because of these shortfalls, it isn't possible to master equity markets (with zero errors) even with decades of experience!!!

Disclosure- Neither invested in Torrent/ Elder nor planning to invest.