Want to be a better investor? Chuck your online portfolio

There are many things which you can do to evolve as better investors. Multidisciplinary learning, reading annual reports, deep knowledge in some business areas, asset allocation, position sizing, concentration vs diversification, portfolio management etc. In this post, I want to share one area which subtly pushes you to becoming a better investor.

These days nearly everyone maintains an online portfolio. These portfolios provide real-time (or delayed by a few minutes) portfolio value. It maintains your buy price, number of stocks, current market price and total current market price of holding.

Now let me come to why you should NOT maintain an online portfolio. It is important to know and understand what action we are taking based on the information I possess. Having an online portfolio does not help in taking any action. For example, if the market value of your portfolio rises 0.5% on a day, do you start thinking that "Wow, I am 0.5% richer, let me sell all my holdings!!". You don't. You mostly stare blankly at the computer/mobile/tablet screen and feel happy (if the portfolio is up), sad (if it is down), very happy (if it is up more than the index) or very sad (if it is down more than the index). So, if you don't really do anything productive with your online portfolio, isn't it time to question why you need it in the first place?

Here are some distinct benefits of NOT having an online portfolio:

• You don't waste time on tracking prices on a daily (or hourly) basis
• You actually do something productive with your time (like reading annual reports, sector reports or getting your day-job completed)
• Your time horizon for investing increases as you are not on a minute-by-minute tracking mode
• You maintain an offline (paper or simple spreadsheet) and update the prices once-a-quarter (or more infrequently if you like). Simple fact of having to look up individual prices will deter you from updating frequently!!
• You will limit the number of stocks in your portfolio from 100s to a much lower number if you have to track prices manually!!

This is one easy way to inculcate a good investing practice. (Apart from stopping to listen to the chatteratti on CNBC). Try it and see if it works for you.

Concentration or diversification - For a midcap or smallcap portfolio

I was talking to a friend. Like me he invests typically in midcap and smallcap stocks. The interesting fact he mentioned was that invests only in 4-5 stocks at a time. That is, he has about 20-25% in each stock of his portfolio. His argument was that Buffet and Munger continue to advocate high concentration in stocks and also followed their own advice and had a large concentrated portfolio. I think he is taking on unnecessary wipeout risk.

My friend is like me, a purely small retail investor and makes investment decisions based on publicly available information with no recourse to management. I agree that Buffet and Munger advice a concentrated portfolio, but only if you understand the businesses very well. For a purely external investor it is very difficult to understand a small or mid sized business so well that they can bet a very large portion of their networth on it. Also, it is important to understand that for mid and small cap investing it is likely that some of your picks will go wrong. And when it happens stock prices can go down 80-90%. It is important to diversify adequately to ensure that you don't get wiped out when, inevitably, some of your picks go bad. I think it is important to have around 10-15 stocks in your portfolio and preferably not all from the same industry sector!

Portfolio Performance - 2011

2011 was an interesting and eventful year (probably like any other). For the Indian equity markets, it was full of fears that was imported from first US and then Europe. This year started with the Sensex at 20509 and Nifty at 6134. It closed the year at 15455 and 4624 respectively. This amounted to a decline of 24.6% on the Sensex. Along with the general market, my portfolio also fell. For the whole year, the portfolio was down 15.19%. That is a substantial percentage. The fall was especially vicious during the last couple of months. When I look back, the portfolio was generating positive returns till the end of October and then fell off sharply. This is because the only stocks I hold are mid and small caps and they have been beaten down in the current environment of extreme uncertainty with respect to the currency depreciation and Eurozone problems.


Although, I do not expect a great turn around in 2012, I would continue to deploy most of my savings to stocks. This is primarily because I am more convinced about the future of businesses to generate above inflation returns than any other form of investment I am aware of. With the market fall, stocks (specially the small and mid-cap variety) are available at good valuations for someone with a reasonably long time horizon. I am not very concerned about short term currency fluctuations and other issues. I don't expect basic business demand & supply to alter based on macro economic concerns, and good and resilient businesses should be able to weather the storm.

Serial #	Name of Company	% of Portfolio (Dec'11)	% of Portfolio (Jan'11)	Since Jan'11	Comments
1	Astral Poly	4.94%	0.00%	New	Accumulate
2	Balaji Amines	5.19%	8.34%	Down	Hold
3	Balkrishna Industries	4.49%	3.59%	Down	Accumulate
4	Cravatex	4.22%	0.00%	New	Hold
5	Elecon Engg	2.43%	0.00%	New	Accumulate
6	GEI Industrial	3.77%	0.00%	New	Accumulate
	Hira Ferro	0	5.12%	Sold
	Indag Rubber	0	0.95%	Sold
7	JK Lakshmi Cement	2.38%	3.32%	Down	Accumulate very slowly
8	Lloyd Electric	1.67%	5.03%	Down	Hold
9	Manjushree Tech	3.70%	0.00%	New	Hold
10	Mayur Uniquoters	10.44%	5.29%	Up	Accumulate aggressively on every dip
11	Opto Circuits	6.05%	8.32%	Down	Hold
12	PI Industries	6.51%	0.00%	New	Accumulate
	Pidilite	0	0.00%	Sold
13	Poly Medicure	1.34%	0.00%	New	Hold
	RSWM	0	6.68%	Sold
14	Shriram TransFi	7.37%	10.90%	Down	Accumulate aggresively on every dip
15	Sintex India	4.02%	9.97%	Down	Accumulate aggresively on every dip
16	Supreme Ind	16.86%	20.65%	Down	Hold
	Supreme Infra	0	3.64%	Sold
17	Titan Industries	4.36%	0.00%	New	Accumulate very slowly
18	Yes Bank	6.86%	5.88%	Up	Accumulate
19	Cash	3.21%	0.09%	Up
20	Nifty Put Option	0.19%	0.00%	New

Buy insurance for your portfolio

This is that time of the year when most salaried employees start thinking about tax saving and inevitably one of the first things that people think of is insurance. It is probably our conditioning that we buy LIC (and these days from private insurers) policies without blinking much of an eyelid. 
What exactly is a life insurance policy? It is nothing but a put option on your earning power. Basically, it protects your family from the loss of your earnings if and when you are no longer there. Simple.


However, a lot of stock investors do not think of buying similar "insurance" policies for their portfolios. I call these stock insurance policies "catastrophe insurance". No, they are not sold by LIC or other such insurance companies. They are traded on stock exchange in the form of PUT and CALL options. 


One way of buying such an insurance is to buy out-of-the-money PUT options of the index for a long duration. For example, if you buy a 4000 or 3900 PUT option for the month of February or March now, you are sort of covering a part of your losses in case the markets tanks. This typically makes sense for people who have very large equity portfolios. You pay a low/moderate premium to get some peace of mind. The way the markets are poised right now, I think it would be a prudent thing to do.

My Rules for Investing

I have been investing for a long time now. After reading a lot on the subject of investing, speculating and trying my hand at all forms like day-trading, swing trading, technical analysis, derivative trading and investing for the long term, I have come to realize that the last one suits my temperament the most and one in which I have actually made good returns.

I have also come to realize that investment discipline is critical for success. And for discipline, a strict set of rules to be followed is critical. These rules should help in deciding when and what to put your money in.  The rules would continue to evolve along with my personal and vicarious experience in the markets.

Here are my set of rules:

Rule 1: Focus your investments. Do not diversify unnecessarily.

Do not invest in more than 15 stocks in your portfolio. It is difficult to follow and track more than 15-20 stocks at a time. It is important to keep yourself focussed on your best investments.  To add a new stock to the portfolio, judge the relative ranking of current holdings and remove one. There may be slight temporary anomalies to this rule to protect paying taxes while selling. So, if a stock is to be held on for a few months more to save on capital gains tax, then the total stocks can go up for that period.

Rule 2: Be sure of the story and check back frequently to see if it is intact.

Be very clear as to why you are buying a stock. You should be able to explain your investment thesis to your mother/wife (I mean someone who is not very clued into stocks) in simple language. The more you understand the story, the greater your conviction.

Rule 3: Plan your sale.

Sell when the story is over, or
Sell when you reach your target price ahead of plan, or
Sell when the fundamentals deteriorate, or
Overall market prices are very high

Rule 4: Never buy or sell in one go.

It is important to stagger you buy and sell to average out price spikes. Also, rarely will you have the money to buy your required quantity in one go. Also, staggering while helps in most cases to get a better overall price. Similarly, while selling, specially, when your target price is reached, it is better to sell in stages.

Rule 5: Plan beforehand what you would do if the price goes down by 10-20% after you buy.

There are two options. 1) Buy more and 2) Stop loss. Make up your mind at the time of your initial investment what you want to do if the price goes down. If your conviction is high, buy more. If this was a dip-stick buy, then maybe cover your losses.

Portfolio Construction: What is the maximum percentage that a single stock should be within the portfolio?

After having answered the first question on portfolio construction (read about it here), the next question that came to me was about the maximum percentage that a single stock should constitute in one's portfolio. Again, there is no "rule" which prevents you from having your 90% of your equity networth invested in one stock. But like the decision to diversify, here also, I personally comfortable to invest up to 25% in one stock. But that would be really rare. I have to be very very convinced of the story and the fact that my downside is limited for me to go to that extent.

I had in two occasions invested close to 25% in one stock. One was in Tata Motors at 100-110 levels. I sold it off around the 980-990 levels after it had failed to break the Rs 1000 barrier and I got frustrated holding on to it :-)

The second instance was Supreme Industries. I had invested around the 40-45 levels (split adjusted). The downside was limited by their real estate value of their Andheri complex. It has since moved to 200+ levels. Although, I have not yet sold my positions in Supreme, the portfolio weightage has reduced because I have added other stocks.

In general, I prefer to have somewhere close to 5%-10% invested in one stock. I typically increase or decrease the position based on market price and my conviction level.

Questions on constructing a portfolio

When I first seriously thought about building an investment portfolio, I had a lot of questions that came to my mind. What I wanted was to build a portfolio that would help me build a sizable capital over a period of time. The plan was that I would add to the portfolio periodically and build up positions. The time-frame that I had (and still have) was around 15 years.

The questions at the top of my mind were:

1. How many stocks should the portfolio hold?
2. What is the maximum percentage that a single stock should be within the portfolio? 
3. When should I sell? Should I have target prices?
4. How much cash should be there in the portfolio?
5. Should I have stop losses?

I though that answering these questions were very important to be prepared for building a log term portfolio. I will try to take you through my thoughts on each of these questions on subsequent posts.

One Stock Portfolio - A thought experiment

Suppose you have a fairly large amount to invest in the stock market. Assume that the amount is a significant amount of your networth. And also assume that you can invest only in one stock. What would you do?
To look at this problem in the Charlie Munger way (by way of inversion), let me see what I would NOT do.

• I would not invest in any company with the following characteristics:-
• Commodity producer
• Capital intensive (one which requires a lot of incremental capital)
• Large debt on its balance sheet
• Company with poor scalability of its core business
• Free cash flow is negligible or negative consistently
• Questionable management
• An insignificant player in its sector

The more I think about this from a top-down approach, the more I get driven towards FMCG, Pharma/Healthcare or Financial sectors. The main aspect for this investment would be that I would not want to lose much of  the money. Here are some stocks I would shortlist:-

• CRISIL
• HDFC Bank
• SBI
• Apollo Hospitals
• Cipla
• ITC
• Godrej Industries
• Titan

The specific pick can vary but I think over time the probability that all these stocks will beat inflation (and fixed deposits) is high.