As a thumb rule, an investor should not be paying more than ~3% of the portfolio as advisory fees per annum. Therefore to justify our fees one should have a minimum capital of Rs 7 lacs. If you have a lower capital to start with, but are confident of adding at regular intervals, then also you may opt for the service. For smaller portfolios mutual funds via monthly SIP could be a more cost effective way to invest in a professionally managed & diversified portfolio.
While researching stocks we do not constrain ourselves on market cap or sectors. We look at small caps, mid caps as well as large caps. Wherever we see value and find opportunity to make high absolute returns with limited downside risks, we go ahead with researching it in more depth. In the long run, it's advisable to have a multi-cap and diversified portfolio.
We would have minimum of 15 and maximum of 25 stocks in the portfolio. We understand historically successful investors have built fortunes by investing in 3-4 great companies and there have also been fund managers who made a killing despite over diversifying to 1000 stocks. Without debating the merits and demerits of these extreme strategies, we prefer a balanced approach to portfolio management and are quite comfortable with a portfolio comprising of 15-25 stocks.
By nature equity markets are extremely volatile; in times of panic it throws mouth-watering opportunities whereas in case of frenzy sometimes valuations go way beyond reasonable levels. So there will be times when we find more number of undervalued stocks and hence you would frequently hear from us and there will heated up times when we prefer to sit on the sidelines and wait for better opportunities. We do not invest in something till the time we are convinced on investment thesis as well as valuations (downside protection) and by nature we are patient enough to wait for such anomalies to arrive and then act based on that. Markets are supreme and we believe imposing any fixed number of stocks and fixed frequency for sharing ideas like monthly or bi-monthly will only be counterproductive.
We manage risks by investing in opportunities where we feel downside risk is limited, business prospects are good and management is ethical, even if that means buying at fair price (rather than cheap). We get 6-7% post tax return from fixed income securities, so we will be satisfied if in the long run we make 18-20% CAGR on our reasonably diversified portfolio; though the number might look small but compounding does magic over long periods of time. To put things into perspective, the richest and most renowned investor in the world Warren Buffet has been able to compound wealth at 22% CAGR over his investing career spanning over 50 years.
Given global as well as domestic developments, there could be 20-25% volatility and portfolio may go negative temporarily however we don’t look at volatility as a risk. For us risk only has one meaning which is ‘permanent loss of capital’. To avoid the permanent loss of capital, we invest only in simple businesses which fall in our circle of competence, enjoy some sustainable competitive advantage, pass our filters on management quality and surprise us while we do intensive scuttlebutt to identify long term trends and preferences.
Not all our stocks will do as expected; but even if six on 10 do well, we will consider it a good outcome as long as we don’t lose much on the other four. Ours is a long term view and hence the right time frame to judge our performance will be over a cycle i.e. 4-5 years or longer.
Generally no one would be equally bullish on all stocks in the portfolio; there would be some stocks where we would be highly optimistic, some with moderate level of optimism and some stocks where we just wish to try our luck (concept stocks). In the light of above, we would have clear allocation attached to each stock in the model portfolio. The minimum allocation would be 3% (concept stocks, newer ideas, emerging stories) and the maximum would be 10% (highest conviction bets with low downside). As a risk management practice we would never cross 10% allocation in any single stock at the time of entry. There would be some stocks where we initiate with a 3% allocation and over time as conviction goes up and/or valuation becomes more attractive we will keep on increasing allocation to higher levels.
However, if due to extraordinary price movements over time the allocation of a particular stock crosses 10%, we might not cut the allocation; why sell our winners?
No, there might be times when we would prefer to sit on some cash and wait for attractive opportunities to arise. However at no point in time, we would go more than 40% in cash.
For us it is a difficult question to answer. Nifty or Sensex would not be the right benchmark for our portfolio as we would hardly have any stocks in common. Not to imply that we are just a small/midcap portfolio, we would indeed have some large cap stocks too but very few in common with front-line indices. That leaves us with CNX500 as one option, for it constitutes not only large caps but broader markets too.
When we worked at designing this portfolio, we did not start by looking at any index. We followed a bottom-up stock picking strategy where we assessed downside risks, visibility of earnings, size of the market opportunity, management competence & integrity and judging attractiveness at prevailing market prices.
Outcomes in investing are never certain, rather probabilistic in nature. We too have had our fair share of mistakes; however, mistakes have been more in the form of opportunity costs rather than capital loss. Case in point- few of our past holdings like Agro-Tech Foods and EPC Industries did not yield any meaningful returns over last many years, as the thesis did not play out.
Fortunately, we haven’t experienced any meaningful loss of capital on any of our investment till date due to our strong processes which filter out businesses with leveraged balance sheet, in sectors experiencing high rate of change, turnaround cases and those run by managements with questionable integrity or bad capital allocation history.
We have also committed series of errors of omission wherein we let go of seemingly obvious multi-baggers because we spotted some negative with business quality or management integrity. We did that with ceramic tile stocks in 2013 and we all know how stocks of Kajaria and Somany performed over the next two years. We believe this is a trade-off we have to bear if we want to follow a ‘process’, which in our case is looking at downside before upside. To continue to follow the process religiously we would have no option but to take our attention away from outcomes and continue to be consistent with the ‘process’, which makes the probability of frequent errors of omission high.
You may signup for free and see some of the our existing holdings with detailed initiating coverage reports at http://investor.stalwartvalue.com/users/sign_up
We hope these reports will give a fair idea on our research process and indicate the kind of depth we go into.
To know more about our process, we suggest you to go through Our Focus on website’s ‘Stock Ideas’ page. Also, you may read our blog where Mr. Khemani has shared some of his old work and thoughts on investing.
Price is a function of two factors- Growth in earnings per share (depends on how well company does) and Valuation i.e. P/E multiple (depends on market sentiments). We prefer to invest in companies where earnings growth prospects are high and valuations have scope of re-rating. Having said that, being human we understand our limitations in predicting the future and hence refrain from sharing any target price or any kind of excel-based forecasting where next quarter’s EPS is forecasted to second decimal point. We will stay invested as long as the thesis is playing out well or till we find better opportunities. Either ways, we will keep you posted with our thoughts through regular (generally quarterly) updates on all our stock ideas.
All our stock ideas are fundamentally backed and are only for investments, implying a long term horizon (at least 3 years). We will indicate the price range at which we are comfortable entering it. We do not issue any kind of trading recommendations and hence no stop loss.