Some Excerpts from Howard Marks’ book “The Most Important Thing-Illuminated”

I think Marks’ book is one of the nicest books on investment on the stock markets. More than a book, it is a compilation of a series of letters written by Howard Marks to the investors who invested with his firm, Oaktree Capital. In the particular Kindle Edition I read, there are also a comments on few of his important thoughts by other influential investors. I really got started on thinking off about investment in 2013 after I read this book, and it is only appropriate that this book should be one of the books I start of by reviewing. It is not so a much a review, as a collection of the highlights I did when I read the book. Read the highlights, but better still, read the book. It will open your minds in new ways.

Chapter 1: The Most Important thing is ….. Second Level Thinking
  • Few people have what it takes to be great investors. Some can be taught, but not everyone … and those who can be taught can’t be taught everything.
  • Even the best investors don’t get it right every time.
  • It is essential that one’s investment approach be intuitive and adaptive rather than be fixed and mechanistic.
  • definition of successful investing: doing better than the market and other investors. To accomplish that, you need either good luck or superior insight.Counting on luck isn’t much of a plan, so you’d better concentrate on insight.
  • As with any other art form, some people just understand investing better than others. Only a few investors will achieve the superior insight, intuition, sense of value and awareness of psychology that are required for consistently above-average results.
  • being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others … which by definition means your thinking has to be different.
  • A second level thinker takes a great many things into account:  What is the range of likely future outcomes? •   Which outcome do I think will occur? •   What’s the probability I’m right? •   What does the consensus think? •   How does my expectation differ from the consensus? •   How does the current price for the asset comport with the consensus view of the future, and with mine? •   Is the consensus psychology that’s incorporated in the price too bullish or bearish? •   What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?
  • First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.
  • The problem with investing is that extraordinary performance comes only from correct nonconsensus forecasts, but nonconsensus forecasts are hard to make, hard to make correctly and hard to act on.
  • to achieve superior investment results, you have to hold nonconsensus views regarding value, and they have to be accurate. That’s not easy.
Chapter 2: The Most Important Thing is…. Understanding Market Efficiency (and its Limitations)

The efficient market hypothesis states that •

There are many participants in the markets, and they share roughly equal access to all relevant information. They are intelligent, objective, highly motivated and hardworking. Their analytical models are widely known and employed. •

Because of the collective efforts of these participants, information is reflected fully and immediately in the market price of each asset. And because market participants will move instantly to buy any asset that’s too cheap or sell one that’s too dear, assets are priced fairly in the absolute and relative to each other.

•   Thus, market prices represent accurate estimates of assets’ intrinsic value, and no participant can consistently identify and profit from instances when they are wrong. •

Assets therefore sell at prices from which they can be expected to deliver risk-adjusted returns that are “fair” relative to other assets. Riskier assets must offer higher returns in order to attract buyers. The market will set prices so that appears to be the case, but it won’t provide a “free lunch.” That is, there will be no incremental return that is not related to (and compensatory for) incremental risk. That’s a more or less official summary of the highlights.

  • Now Marks’ take. When he speaks of this theory, he also uses the word efficient, but he means it in the sense of “speedy, quick to incorporate information,” not “right.”
  • Because investors work hard to evaluate every new piece of information, asset prices immediately. reflect the consensus view of the information’s significance. Marks’ does not, however, believe the consensus view is necessarily correct.
  • If prices in efficient markets already reflect the consensus, then sharing the consensus view will make you likely to earn just an average return. To beat the market you must hold an idiosyncratic, or nonconsensus, view.
  • describing a market as inefficient is a high-flown way of saying the market is prone to mistakes that can be taken advantage of.
  • A market characterized by mistakes and mispricings can be beaten by people with rare insight.
  • Because assets are often valued at other-than-fair prices, an asset class can deliver a risk-adjusted return that is significantly too high (a free lunch) or too low relative to other asset classes.
  • If prices can be very wrong, that means it’s possible to find bargains or overpay.
  • Marks’ wholeheartedly appreciates the opportunities that inefficiency can provide, but  he also respects the concept of market efficiency, and he believes strongly that mainstream securities markets can be so efficient that it’s largely a waste of time to work at finding winners there.
  • Efficiency is not so universal that we should give up on superior performance. However, we should assume that efficiency will impede our achievement unless we have good reason to believe it won’t in the present case.
  • For investors to get an edge, there have to be inefficiencies in the underlying process—imperfections, mispricings—to take advantage of. Some assets have to priced too low, or some too high. You still have to be more insightful than others in order to regularly buy more of the former than the latter.
  • Let others believe markets can never be beat. Abstention on the part of those who won’t venture in creates opportunities for those who will.
  • The key turning point in Marks’ investment management career came when he concluded that because the notion of market efficiency has relevance, he should limit my efforts to relatively inefficient markets where hard work and skill would pay off best.
  • We can fool ourselves into thinking it’s possible to know more than everyone else and to regularly beat heavily populated markets. But equally, swallowing theory whole can make us give up on finding bargains, turn the process over to a computer and miss out on the contribution skillful individuals can make.
Chapter 3: The Most Important thing is…. Value
  • The oldest rule in investing is also the simplest: “Buy low; sell high.”
  • There has to be some objective standard for “high” and “low,” and most usefully that standard is the asset’s intrinsic value.
  • For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point.
  • There are two general broad ways of investing (excluding technical analysis, which Marks dismisses with disdain).
  • The difference between the two principal schools of investing can be boiled down to this:

•    Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price.

•    Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to produce substantial appreciation.

  • To Marks, the choice isn’t really between value and growth, but between value today and value tomorrow. Growth investing represents a bet on company performance that may or may not materialize in the future, while value investing is based primarily on analysis of a company’s current worth.
  • Compared to value investing, growth investing centers around trying for big winners. If big winners weren’t in the offing, why put up with the uncertainty entailed in guessing at the future? the upside potential for being right about growth is more dramatic, and the upside potential for being right about value is more consistent. Marks describes himself as someone from the Value Investing School.
  • Is Value Investing Easy? No. For one thing, it depends on an accurate estimate of value.  Also, If you’ve settled on the value approach to investing and come up with an intrinsic value for a security or asset, the next important thing is to hold it firmly. That’s because in the world of investing, being correct about something isn’t at all synonymous with being proved correct right away. The most value investors can hope for is to be right about an asset’s value and buy when it’s available for less. But doing so today certainly doesn’t mean you’re going to start making money tomorrow.A firmly held view on value can help you cope with this disconnect.
  • Many people tend to fall further in love with the thing they’ve bought as its price rises, since they feel validated, and they like it less as the price falls, when they begin to doubt their decision to buy. An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse.
  • Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out. Thus, there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third: you have to be right.
Chapter 4: The Most Important Thing Is….The Relationship Between Price and Value
  • Investment success doesn’t come from “buying good things,” but rather from “buying things well.”
  • If your estimate of intrinsic value is correct, over time an asset’s price should converge with its value.
  • Remembering that the market eventually gets it right, is one of the most important things to remember when the market acts emotionally over the short term.
  • It’s essential to arrange your affairs so you’ll be able to hold on—and not sell—at the worst of times. This requires both long-term capital and strong psychological resources.
  • What should a prospective buyer be looking at to be sure the price is right? Underlying fundamental value, of course, but most of the time a security’s price will be affected at least as much—and its short-term fluctuations determined primarily—by two other factors: psychology and technicals.
  • Technicals are nonfundamental factors—that is, things unrelated to value—that affect the supply and demand for securities.
  • The second factor that exerts such a powerful influence on price: psychology.
  • Whereas the key to ascertaining value is skilled financial analysis, the key to understanding the price/value relationship—and the outlook for it—lies largely in insight into other investors’ minds. Investor psychology can cause a security to be priced just about anywhere in the short run, regardless of its fundamentals.
  • The key is who likes the investment now and who doesn’t. Future price changes will be determined by whether it comes to be liked by more people or fewer people in the future. Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.
  • The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price, can only go one way: up.
  • Psychology is an area that is (a) of critical importance and (b) extremely hard to master.  First, psychology is elusive. And second, the psychological factors that weigh on other investors’ minds and influence their actions will weigh on yours as well.
  • It’s essential to understand that fundamental value will be only one of the factors determining a security’s price on the day you buy it. Try to have psychology and technicals on your side as well.
  • The polar opposite of conscientious value investing is mindlessly chasing bubbles.
  • All bubbles start with some nugget of truth. A few clever investors figure out (or perhaps even foresee) these truths, invest in the asset, and begin to show profits. Then others catch on to the idea—or just notice that people are making money—and they buy as well, lifting the asset’s price. But as the price rises further and investors become more inflamed by the possibility of easy money, they think less and less about whether the price is fair. People should like something less when its price rises, but in investing they often like it more.
  • Valuation eventually comes into play, and those who are holding the bag when it does have to face the music.   •   The positives behind stocks can be genuine and still produce losses if you overpay for them. •   Those positives—and the massive profits that seemingly everyone else is enjoying—can eventually cause those who have resisted participating to capitulate and buy. •   A “top” in a stock, group or market occurs when the last holdout who will become a buyer does so. The timing is often unrelated to fundamental developments.
  • “Prices are too high” is far from synonymous with “the next move will be downward.” Things can be overpriced and stay that way for a long time … or become far more so. •   Eventually, though, valuation has to matter.
  • In bubbles, infatuation with market momentum takes over from any notion of value and fair price, and greed (plus the pain of standing by as others make seemingly easy money) neutralizes any prudence that might otherwise hold sway.
  • Buying at the right price is the hard part of the exercise. Once done correctly, time and other market participants take care of the rest.
  • One of the most important roles of your strong view of intrinsic value is as a foundation for conviction: to help you hang in until the market comes to agree with you and prices the asset where it should.
  • There are four possible routes to investment profit
  1. Benefiting from a rise in the asset’s intrinsic value.
  2. Applying leverage.
  3. Selling for more than your asset’s worth.
  4. Buying something for less than its value.
  • The most dependable way to make money. Buying at a discount from intrinsic value and having the asset’s price move toward its value doesn’t require serendipity; it just requires that market participants wake up to reality. When the market’s functioning properly, value exerts a magnetic pull on price.
  • Of all the possible routes to investment profit, buying cheap is clearly the most reliable. Even that, however, isn’t sure to work. You can be wrong about the current value. Or events can come along that reduce value. Or deterioration in attitudes or markets can make something sell even further below its value. Or the convergence of price and intrinsic value can take more time than you have;
  • Trying to buy below value isn’t infallible, but it’s the best chance we have.

Portfolio Composition on February 17, 2017

While much of the discussion here is on financial markets, my personal investments are more diversified. More than 50% of my investments are in real estate (including my self occupied house and office*). My equity investments (including PMS, Equity Mutual Funds and Direct Equity) amount to less than 25% of my total investment. Trading Equity(**) amounts to less than 7% of my entire set of investments.

Over time, I expect to see movement in this portfolio composition, with the relative allocation to equity increasing, the allocation to  indian real estate investments decreasing, the role of overseas real estate investment increasing (from zero presently), the allocation to  angel investments increasing and the role of bullion rising to around 2% of porfolio.

Notes

P.S. * I debated whether to include my self occupied house and office in my total investments. The reason for the debate is that you are unlikely to sell your house or office, so why include them in the mix. I eventually included them, because both are really too large for my long term needs. They are fungible, because I could also move to smaller spaces at a much lower cost.

P.P.S. ** While the amount of trading equity is only 6.7%, in reality, it is larger, if I include the cash I hold in reserve for drawdowns, and the stocks that I can give as margin for trading.

Monthly Updates on Portfolio Performance

In an earlier post, I had mentioned several reasons why I would not publish monthly updates on portfolio performance anymore.

However, it is now time to revisit those reasons. The first reason I gave was a practical one. I was spending too much time on monitoring day to day performace, and that was taking a toll on me. Well, I have now used Access and VBA to create a database infrastructure, and so the difficulty in monitoring has been minimized greatly. I still have to spend half an hour or so everyday to enter everything, but I need it do monitor my trading activities anyway.

The second reason I gave was that I was spending too much time on minute by minute monitoring of my stock portfolio, leading to increased trading activity. Well, over time, I have acquired the discipline required not to obsess over minute by minute changes, even if I do monitor them. So I am less worried about it than earlier.

The third reason I gave was that as a long term investor, I did not see the need to compare myself with benchmarks on a monthly basis. I still believe this to be true. But I am now also a trader, and in trading, I am trying to trade for income. So that certainly involves monitoring myself in the long term and short term against benchmarks. Also, I realize that as an investor or as a trader, I do need to have “Alpha”, an outperformance against benchmarks.

Conclusion

Because my thinking has evolved, or because my situation has changed, I am now resuming the posting of monthly updates on performance.

Links to Great Articles on Creating Wealth


Articles on wealth creation

Here is a nice post on the habits of people who have created wealth, and the rules you can follow to get there.

What is the difference between Getting Rich and Staying Rich.  The link has a great article on staying humble to stay Rich. I would also add that remaining teachable is also a good way to staying rich. It is hubris that can make the difference between Getting Rich and Staying Rich.

The wealth creation journey is not a slow and steady one. If one wishes high returns, one must be prepared for high drawdowns as well. The drawdowns are both in terms of money and in terms of emotions. Here is a great article which talks about the importance of stoicism in the wake of large drawdowns, and why reacting with equanimity to a large drawdown is critical if one wants monster returns.

Here is another one along the same lines where the author talks about how short-term loss is the price of admission into long term gains. 

 

Links to Great Articles on Investing


Links to great articles on investing

Here is a nice post by Nooresh Merani on not to get impressed by short terms returns in markets.

Here is an Investopedia Article which very sensibly talks about why a long term view is important to be a successful investor.

Long term investors are often in a dilemna if a stock they own runs up a lot. If they would not buy fresh stock at that price, should they sell? Here is a post by Sanjay Bakshi on the notion that for long-term investors in high-quality businesses, the rules for buying a stock and those for holding a stock are not the same.

Here is an extraordinary article on how to rationally evaluate the different returns that different asset classes obtain, and how to diversify away risk and volatility by constructing a portfolio. The conclusions are not great for someone seeking Alpha, as the author suggests that because diversification is extremely easy these days, and because there is a long history of markets, stock market valuations would rise to a point where the differential in return between stocks as an asset class and other asset classes like government bonds will narrow or disappear.

Here is a great post on different levels of investors, and how one can progress (if at all) from being a good investor to being a great investor, and from being a great investor to being a legend.

 

2 Month Investment and Trading Returns (As on Feb 08, 2017)



 

Here is a comparision of my last 2 month performace of both Trading and Investing, relative to various indices and mutual fund performance.

Investing performance is slightly understated, since it does not include dividends. In the next installment, I shall take care of this.

I have explained the methodology involved in creation of these performance curves elsewhere.

I don’t want to comment on this performance too much, since it is only a 2 month performance, during which the market yo-yoed like crazy. But still, it is interesting to note that my investing performance was better than my trading performance.

The Genesis of my conversion to Technical Analysis



Around July August 2014, after the steep “Modi Rally”, I rapidly started running out of ideas on fresh stock picking possibilities. The stocks and the kinds of businesses I liked had become very expensive, and I was finding it difficult to justify to myself the price to acquire positions in stocks.

I also felt at this time, that some of the stocks had run up far ahead of economic fundamentals, and that the government did not have a magic wand to address all the economic difficulties faced by the country.

I also felt like shorting some stocks!!

I never believed in Technical Analysis. I used to try and read Vivek Patil’s technical analysis every week, and it seemed like a huge set of mumbo jumbo to me. I felt that in hindsight, anybody could fit anything to data. It also did not make sense to me that if a stock was going to be bought at multiple times during its rise, it was just better to buy and hold.

Coupled with this was the nonsense dished out on CNBC every day. I never could figure out, for the life of me, how some guy could come every morning, and name a few stocks to buy. What is more, these choices did not seem very appropriate. Having been bred on the virtues of a “buy and sit tight” philosophy, these technical analysts seemed very silly.

Yet, as my interest in stocks built, I could not but help recognize that “strong stocks” often tended to keep becoming stronger, sometimes to the point of irrationality from a normal valuation framework. Similarly, I could not help noticing that prices often fell in advance of news or a change in a commodity cycle. Similarly, a trending market move, like the Modi Rally, often moved all stocks, regardless of financial performance of the company in question.

This is where my interest in technical analysis started. Initially, I was just studying simple charts, and seeing how a stock would neatly rise above its long term moving average for example. Then I got to reading some books. Finally, I mustered the courage to go attend a meeting, Traders Carnival, in August 2014. I frankly did not learn much there, but I did get introduced to the field. I also ponied up some money to invest in software called trader’s cockpit, which allowed some rudimentary back testing and some simple strategy creation.

When I started playing around with Trader’s Cockpit, I clearly got some results on back testing. Trader’s cockpit has the facility of sending SMS’s of trade alerts, and allows you to paper test a strategy. So I started with that too.

I also started reading books. I read a book on Trading Systems on Kindle, which gave me a great introduction to risk, portfolio sizing, portfolio management, limiting risk through stop losses, the limitations of stop losses (no system I have developed so far has a stop loss), parameter optimization, over fitting and the dangers of over fitting.I am so glad I read this book well. It has really prepared me for the future.

Finally, by February-March 2015, I had started realizing the limitations of Trader’s Cockpit as a strategy development and testing tool. So, after some hesitation, I bought Amibroker, and shortly, a data feed. I then downloaded some code from Marketcalls, and decided that using that code, with parameter optimization,  optimal position sizing and low brokerage, I could trade the bank nifty profitably. More on my journey in the next post.

Lack of Updates on this blog



It has been more than a year since I posted anything on this blog.

Previously, I was posting my investment performance everymonth.

Nowadays (since around March last year), I don’t monitor my investment performance every day. Previously, I used to purchase (mostly) or sell stock everyday. However, since the last year, this trading frequency has come down considerably. One, because I reached my target of how much money I wanted to invest in stocks as a percentage of my overall portfolio. Second, because I could not find the kind of bargains I wanted. In the last two months, some of the bargains did appear (and because my portfolio shrunk, I again have room to invest in stocks withing my overall asset allocation plan). Alas, I was short of cash because of a variety of investment needs and taxes, so I could not do so.

However, I do monitor my investment performance on a quarterly basis. At the beginning of April, I shall post my portfolio performance, along with my choice of stocks.

Another reason that I don’t monitor my investment portfolio that much is that I am reasonably satisfied with it. It contains a set of diversified stocks (diversified on the basis on industry, size, short term and long term prospects, dividend yield), which I don’t wish to tweak very much.

So I will keep posting portfolio updates every quarter. However, this blog shall now be a lot more about my trading systems performance.

More on this later!!

Learnings and Questions from my Investing Journey (So Far)



It has been almost a year and a half since I started equity investing seriously.

During this time, my portfolio of stocks and equity mutual funds has risen by more than 7 times. During this time, the amount of money I had in equity mutual funds has halved, while the amount of money invested in direct equity has tripled. On balance, the portfolio has gained around a 100% in a year and a half.

Obviously, one has made a lot of money. I almost have my first 10 bagger (MPS) in less than a year and a half. Several Stocks (PFS, Mayur, PI, Sintex,Shilpa, VST(since sold), IRB, Bharat Forge, Balkrishna, Kaveri,Polymedicure,Oriental Carbon, Munjal Auto, KRBL,CanFin Homes, Orient Cement, RS Software) have risen between 3 and 5 times. Several of my more recent purchases, like Ajanta, Indiabulls Housing Finance, Akzo Nobel, Kitex, GPPL, Amara Raja, Bayer Cropscience, Munjal Showa) have also shown terrific performance. Many of the stocks which I picked, and sold (because I thought they had run up too quickly, like Igarashi Motors, Kesar Terminals,GMM Pfaudler, SRF, Alkyl Amines Chemicals, and Avanti Feeds, went on to prove me spectacularly wrong, with me paying taxes to boot. So lots of hits.

Some quality companies, like Cummins, Grindwell Norton, Larsen, EClerx have given me great returns too. Private Banks,like ICICI and Federal Bank haven’t done badly, but in fact the PSU banks (at least in my portfolio) have done better.

What about misses? PSU banks have not done that well, but I would not call them misses. Clearly Metal Stocks, like SSLT, Tata Steel, Hindalco, NMDC, Hindustan Zinc were a miss. Most of these I purchased during September-October 2013. Given that, they have all risen around 50-70% from there. However, I have purchased NMDC, SSLT and Hindustan Zinc at prices higher than currently. Selan has given me good profits (because I sold at the right time), but I still hold some, and it has come right back to where I purchased it.

The two stocks that have the highest weightage in my portfolio IDFC and Oberoi Realty have clearly not performed as well as some of my best picks. Holding and Investment Companies (and I own Tata Investment, Bajaj Finserv and Bajaj Holdings, and if you can it call it that, EID Parry), and while these stocks have not done badly, they have hardly risen 300-4000%, even though they represented value when I purchased, and represent even more value today. I haven’t purchased Tata Investment or Bajaj Holdings lately, though I have recently purchased a whole lot, since it the only meaningful listed insurance play.

Another stock which has consistently disappointed this year has been Reliance. Another disappointment has been Bajaj Electric. A third has been Tata Global beverages. And finally NTPC has hardly moved, though it has fulfilled my investment goal of a 5% dividend and a 10% stock price rise annually. In such stocks, one has to pay the right price and one must clearly know one’s investment goals. I sincerely feel that stocks like SJVN and NTPC are necessary to have in one’s portfolio, since they insulate you from severe capital loss, and give steady returns. But one must buy them at the right price.

All in all, my crazily diversified portfolio has given returns better than most mutual funds. However, had I invested in only

i) ValuePickr Portfolio companies my returns would have been 2-3 times my current returns.

ii) Prudent Equity Stocks (Looking for deep value stocks, with poor business characteristics) would have lad my returns to at least twice what they are.

So I have not done that well

So what have been the learnings:

a) I stayed away from Stocks that had high PE’s. Which meant I have very little of the likes of Unilever, and Colgate and Gillette, and the ABB’s of the world. On balance, I think this was a good strategy. In face, I sold Colgate and bought Cummins, and Cummins has done much better. I think the high PE stocks are terrific businesses, but others think so too, and so they have not been spectacular purchases. On the other hand, quality businesses (or businesses with poor management quality but great structural tail winds) with low PE’s at the time of purchase (like BKT,Mayur, MPS or IRB, or Canfin or IBHL) gave spectacular returns.

b) Investment companies seem to be a no-no. As a wise young man told me once, these companies which merely are the promoters holding companies will rarely reward minority shareholders, because there is never value unlocking.

c) Commodity stocks will in general mirror commodity prices. So these stocks ought only to be bought after several months of an extreme price breakdown in that particular commodity, and that also, only if the company is not highly leveraged. Trying to catch a falling knife in these companies can injure one’s portfolio badly

d) Markets often give you spectacular mispricing. If one has courage in one’s conviction, one can exploit the mis pricing wonderfully.

e) High Leverage can be very toxic. Highly leveraged companies ought to be avoided in all circumstances, no matter what price the business is available at.

f) It is easy to fall in love with a stock.I think before one keeps purchasing, one needs to get the contra view. And one needs to consider the contra view seriously.

g) I am naturally slightly risk averse, and I have great curiosity. So I often buy for diversification, and I often buy because I just like some company’s financials, or because someone recommends it. But it is easy to buy a 150 stocks, much tougher to buy only 20. But it is much easier to manage 20. So one needs to make a real effort to cut down on the number of stocks one holds.

Questions

a) If one knows that some stock is likely to do better after a year, is it better to buy now, or wait for 9 months and then purchase. Obviously, if I know it, other market participants too know, and won’t the stock price run up before actual company performance? I have accumulated both IDFC and Oberoi Realty in this hope, that the stocks will do much better after a period. I also knew the negatives. In the case of IDFC the negatives were clear:

i) Infra finance was a dog. There is lack of demand for finance, existing accounts are struggling and the company had lent to gas based plants, which are just postponing their day of reckoning

ii) In the transition to becoming a bank, IDFC will increase costs. But the returns will come only a few months after the bank actually fructifies. Also, the company can’t increase its book too quickly, because otherwise it will have a hard time meeting priority sector targets.

iii)FII’s can’t buy IDFC stock, and FII’s are the main providers of liquidity.

Instead of IDFC, one could have easily bought a newer less mature Bank, like Yes, and made spectacular returns already.

In the case of Oberoi, the poor state of the Mumbai Real Estate Market is a clear negative. Presales are slow, the company is not able to lease its new tower, the new Worli tower has flats priced in the range of Rs. 25-30 crores each, and how can the company sell 250 of these? And finally, the slow pace of construction and launches. One could have easily bought a Bangalore play like Brigade.

Yet there are features of both companies which ought to lead to price recovery by the first quarter of 2015-16. But what if the overall market has tanked by then, or really risen up? One misses out on the run up in stocks which are already doing extremely well, and the opportunity cost is nothing to be sneezed at. Isn’t it better to be buying the stocks later, even if you don’t get very cheaply, but buying something that is rising now? Time will give me the answer to these questions.

The second question is what stocks to buy? How much should one trust the market? There are influential market gurus advocating that one buy’s stocks which have hit 52 week highs, not stocks which are at a loss. I buy those stocks which fall, not the ones which rise. It seems to me that if something is available cheaper (for eg in a sale) in real life, I rush out to buy. I don’t buy clothes when the prices are the highest. Why should it be different in Markets? But so far, in this market, in the last one and a half years, it seems to me that these gurus make sense. If I would have bought the same stocks which had given me more returns already, I would have had even better returns. Again, I have not followed their advice. Again, Time will tell how right the gurus are.

Current (December 2014) Portfolio Picks



As mentioned in the previous post, I am no longer monitoring my portfolio picks for performance. However, the downside to this is that I do need to restrict my stock universe. I have brought down the number of stocks in my portfolio. I intend to keep bringing this down. Below is my current update and outlook on the eventual 40 odd stocks I intend to have in my long term portfolio:

Sector
Sector Stock Current Outlook Weightage in Portfolio
Finance 13%
IDFC Accumulate
ICICI Bank Sell on Rises
Indiabulls Housing Finance Accumulate
Diversified 2%
Reliance Accumulate
DCM Shriram Buy
Consumer Facing 6%
Akzo Nobel Hold
United Spirits Hold
Indian Hotels Hold
IT 6%
TCS Accumulate
EClerx Accumulate
MPS Hold
Pharma 5%
Shilpa Hold
Ajanta Hold
SPARC Accumulate
Investment Co 4%
EID Parry Accumulate
Bajaj Holdings Sell
Bajaj FinServ Accumulate
Tata Inv. Corp Hold
Oil and Gas 1.50%
HPCL Hold
Cap Goods 2.50%
L&T Accumulate
Infrastructure 3.50%
IRB Infra Accumulate
ITNL Accumulate
GPPL Accumulate
Financial Intermediary 2.50%
IVC Accumulate
Metals 4.50%
Sterlite Hold
Tata Steel Hold
NMDC Accumulate
Hindustan Zinc Accumulate
Engineering and BtoB 9%
Cummins Hold
Grindwell Norton Hold
Bharat Forge Hold
Mayur Uniquoters Hold
Polymedicure Hold
BKT Accumulate
Auto Ancilliaries 4%
Munjal Showa Hold
Banco Hold
AmaraRaja+Exide Hold
Agriculture and Agrochemicals 4%
PI Hold
Kaveri Sell
KRBL Hold
Real Estate 12.50%
Oberoi Realty Hold
Nesco Hold
Sobha Hold
Telecom
Idea Buy 1%
Total 81.00%

Of course, these 45 odd stocks constitute only 81% of my portfolio. Even these 45, I want to trim down to 25. Of the remaining 19%, the prominent ones I want to dispose off include: ITC, BASF Agrochemicals, Oriental Carbon, Selan,RS Software, CanFin Finance, Unichem Labs, Muthoot Capital, Shriram City Union Finance, PTC Finance, Kitex Garments, HUL, Gillete, Repro, National Peroxide, Mazda, Gandhi Special Tubes, Syndicate Bank, Carborandum Universal and Oriental Bank. I would do this right away, but the problem is that I am sitting on hefty capital gains on these, and I will wait for a year of holding to get rid of them. In some cases, I don’t like the stock well enough to buy, but I like it well enough to be reluctant to sell, unless I get a good price.

Pls. note: The above is simply a list of stocks I hold, and don’t intend to hold. This is a personal journal. It is neither a recommendation to buy/sell, nor is it an endorsement of any of the stocks being discussed. I am an amateur investor, with a patchy record, and my own peculiar risk profile. Please do your due diligence before you buy/sell any stock.