Hope you are doing well.
In this mail, for the benefit of all the readers, we are sharing replies on some often-asked queries by members.
Recommended stocks have corrected in the last 1 year – To put things in perspective:
Since Aug’18 the Alpha model portfolio is down 12.84% and if we include the interest on surplus cash, the portfolio will be down only around 11%.
For the same period mid cap index is down 17.5%, SENSEX is down 3.6% and small cap index is down 23.2%.
So, yes, the stocks are down; however, as the numbers indicate the entire market (barring top 10 stocks) is bleeding and we have done relatively better despite us holding mostly small cap stocks.
And I can assure you, we hope to do significantly better than both SENSEX and NIFTY in longer run (like we have done in the past) as 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 happens, we could see dual effects of earnings expansion and valuations re-rating.
No change in Model portfolio in the last 1 month – In Alpha Model we are invested ~70% and in Alpha + Model ~83%.
Secondly, it’s been only a month and in fact in Alpha + Model, we added special situation opportunity on 25th Aug’19.
Lastly and most importantly, our model portfolios don’t have the luxury of regular savings and addition of new money every few months. We have to manage with 50 lakhs amount (as indicated in the portfolio) and even in the worst of periods (in terms of market correction) our allocation will probably never exceed 95% as we would like to maintain some liquidity at all times.
Thus, with the current allocations, we believe we are well invested and will keep increasing the allocation going forward.
If you have some savings every month, you could consider adding in model portfolio stocks, while trying to maintain the allocations as per the sheet.
Greenply has moved up after exiting – I would like to give you some examples. When we sold Chaman Lal Setia at 150 and Ruchira Papers around 190, we got a similar mail from another client telling us we are wrong as small and mid-caps were going up and Chaman Lal setia went up to 200. Chaman Lal is now trading around 60 and Ruchira Papers around 100.
Similarly, when we booked more than 160% profit in DFM Foods in 4-5 months (the stock was trading at 50 PE then), some members were still disappointed as we couldn’t ride another 50% gain on the same and hold it for 75 PE. It’s been 3 years since then and the stock is around the same levels we exited.
Coming back to Greenply, we cannot have the most precise exit and purchase for any stock, because market movements aren’t based on laws of Physics. One has to follow one’s own rules and follow the process. We cannot predict whether the stock will suddenly find market fancy and will start trading at 50-60 PE or will go out of favor and start trading at 10 PE.
Based on our estimates, we believed Greenply could trade in the range of 1,100 crore to 1,900 crore and found 1,600 crore market cap good point to exit. Also, we believe MDF business could do much better in next 3-4 years than Plywood business.
Lastly, the ultimate purpose of investing in equities is to create wealth on Portfolio basis. I can assure you; we will have several such cases in future as well wherein we will either book some losses or miscalculate and exit relatively early; however, we hope to do well on overall portfolio on both absolute and relative basis.
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