I hope you are doing well.
It’s been more than a year since we started model portfolio service on 15th Aug’18 and I thought of sharing views on performance, markets and other details.
In the last 13 months our Alpha Model Portfolio has delivered negative return of 12.60%.
In the above performance we haven’t accounted for interest accrued on surplus cash; however, the same would have improved our performance by ~1.5-2%.
For the same period Mid cap index is down by 16%, SENSEX is down by 1.2% and Small cap index is down by 23%.
One obviously doesn’t feel great being down by 11-13% on year on year basis and we have obviously not been able to beat SENSEX or remain anywhere close in the last 1 year; however, we feel good about the fact that despite our stocks being largely small caps, we have done much better than the broader markets.
One could have performed better by sticking to few marquee names; however, we are willing to look foolish in the short term than under-perform for several years to come.
We believe, most of the stocks we are invested in have built or are in the process of building capacities for future growth and once the economy starts picking, they will be big beneficiaries of the same.
Another important factor is that the valuations of stocks we are invested in are low on already depressed earnings and therefore once the recovery in earnings happen, we could see dual effects of earnings expansion and valuations re-rating.
With our recommendations, we have also tried to ensure that balance sheets are strong and not overly-leveraged or if at all the companies had high debt (due to capacity expansion), they have already started de-leveraging.
Markets – Frankly, we don’t have much understanding of macro environment, at least in the sense that we cannot predict when the turnaround will happen. Same way, I think no one could have predicted the kind of slowdown we are going through. On the contrary, it was generally expected that economy would recover post the stabilization from the shocks of de-monetization and GST.
However, what we are very sure of is that most of the things are cyclical; be it economic activity or investor participation.
While economic activity is certainly trending downwards, the investor interest/participation is also much closer to record lows.
As indicated in one of our recent articles on Market outlook: Are we close to the bottom or is there more downside? market bottom is probably closer than ever and surely a good time to be greedy than fearful.
We also believe that as the economy is slow, the markets may not have a v-shaped recovery and could grind around like 2001-03 or 2012-13.
If you are interested in some eye-popping data points on investor participation, you can read the article HERE
Booking losses – This is another important topic in our view and we would like to share some of our thoughts on the same.
Frankly, no one likes to book loss and all of us would like to see all our investments sold at gains; however, in a practical world there are always going to be a few cases of losses and how we deal with them separates good investors from bad.
In a bull market a lot of our investment mistakes get covered up and sometimes we don’t even get to realize that we made a mistake; however, bear markets amplify our mistakes and sometimes even the right decisions look like mistakes in the short term.
Coming back to booking losses, we do so because we end up realizing that holding the stock may not be the best option. Sometimes, there are stock selection mistakes in the beginning itself. The mistake could be in the form of wrong business, wrong management or wrong valuations.
These are some of the mistakes which we would like to avoid at all cost.
There are also times when the initial investment theses might be right, but over the course of time external factors change making the stock unworthy of investment. These cannot be completely avoided because investing is all about dealing with unknown and uncertainty.
However, if the external environment has changed adversely, we are much more comfortable getting the elephant out of the room, than persist with the problem.
The good way to deal with booking a loss in such cases is to ask yourself whether you will be better off investing in some other company with higher potential for delivering returns or sticking to the same company.
If you have better investment idea (including cash), then with just about 0.5% transaction cost, you will be better off converting unrealized loss to realized loss and move on to better opportunity.
Portfolio sizing – Last, but not the least, this is again a very important topic.
As you all know, we give indicative weightages for our stocks. We believe weightages are important and somewhat akin to dosage recommendation by doctors.
Considering the fact that investing is more of an art than science, there cannot be elaborate rules for such weightages; however, our indicative weightages are somewhat governed by the fact that we don’t mind holding up to 20 stocks (+/- few) in our portfolio.
Weightages are also governed by the quality of business, growth profile and valuations. In the past, i.e. around 2011-13, a lot of high quality companies with good growth profile were available at very reasonable valuations and one could have made much higher allocations of the order of 10% or more, but since the last few years (even now), almost all the high quality companies are trading at reasonably higher valuations and with lower average growth.
At 30-50 times earnings and when the annual growth is 10-15%, we believe the scope for capital appreciation remains limited; in fact, there’s even higher probability of stocks getting de-rated, despite the growth in earnings.
Thus, we believe, one should be flexible with portfolio sizing and not necessarily be absolutely rigid about number of stocks in portfolio.
Also, if you wish to run a really concentrated portfolio of 5-10 stocks, never do it on the back of someone else’s recommendation/research and borrowed conviction.
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