Launching the Dead Monk’s Portfolio – Ground Rules

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After a lot of deliberation, both recorded (Part 1, 2, 3, and 4) and unrecorded, we have finally managed to put down the ground rules for Dead Monk’s Portfolio.


If you haven’t read our earlier posts on this issue (which changed our hearts), we recommend you do so. It will give you an idea about how and why we zeroed upon this approach.



So without further delays, we present to you the details of our new portfolio in form of FAQs.
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Where has the old portfolio vanished?

We have abandoned our old portfolio – Monk’s Portfolio. We have removed all posts related to it.
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Then what is this new portfolio?

The new portfolio is named DMP – the Dead Monk’s Portfolio.
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Why such a funny name?

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Do you have to pray to God for making this portfolio work?
Yes. We have a Portfolio Prayer (We need it) J


~ ~ ~
Remember God in good times and equities in bad times.

We shall welcome bear markets as they allow us to buy from pessimists.

We shall love fear and blood on the streets.

We will always buy with an intention to hold for long periods and preferably, forever.

We shall hate selling stocks, unless fundamental reason of buying them changes for worse.


Amen.
~ ~ ~
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What is DMP’s basic structure?


The portfolio would follow Core-Satellite approach with one core and four satellites.


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Can you give the details of the new portfolio’s exact structure?


Dividend Core
This would form 50-60% of the portfolio.

This would comprise stocks which
          Are regular dividend payers
          Have paid dividends consistently for last 5 to 10 years
          Have been profitable in last 5 years
          Have sustainable & ordinary dividend yield of more than 3%
          Have a sustainable dividend payout ratio
          Trade at low P/E multiples (<12; preferably <10)
This part of DMP would result in a regular, sustainable & increasing income stream, which would be used to increase the size of DMP by reinvesting these dividends selectively in stocks already present in DMP.
Growth Oriented
This would form 20-25% of the portfolio.
This would comprise of stocks which
          Are from mid-&-small cap
          Have been in existence for around 10 years
          Even with most pessimistic outlook, would survive for next 10 years Or should be good takeover targets
          Have been profitable in last 3 years
          Trade at low to medium P/E multiples (preferably <20)
          We don’t expect such stocks to pay dividends
          Good ROE in past 5 years
          Good and dedicated management
These stocks would be our bets on long term growth and can be potential future blue chips. These would be businesses which have potential as well as management genuine intent to reach the blue chip category. But we must be cautious that obvious prospects for physical growth in a business do not translate into obvious profits for investors (Graham).

Large Caps
This would form 15-20% of the portfolio.
This would comprise of stocks which
          Are from large cap category (preferably of Market Cap>Rs 15,000 Cr)
          Have been in existence for more than 20 years
          Even with most pessimistic outlook, would survive for next 10 years
          Have been profitable in last 5 years
          Trade at low P/E multiples (<12; preferably <10)
          Trade at low P/BV multiples (preferably <2)
          If they do pay regular dividends, then nothing like it J (why we love dividends so much?)




Large caps give strength and stability to our portfolio as they are better suited to weather downturns, economic recessions, etc.

Cyclicals (Large + Mid Cap)
This would form 10-15% of the portfolio.
This would comprise of stocks which
          Are preferably from large cap category
          Have been in existence for more than 10 years
          Even with most pessimistic outlook, would survive the next downturn and for next 10 years
          Have been profitable in last 5 years
          If they do pay regular dividends, then nothing like it.
We would have loved to time our entry into cyclical stocks because there cannot be better wealth creators if one can time one’s entry and exit well. But timing, that too cyclical business’ is tough. That is why we prefer large caps of cyclical companies as they can weather the downturns better than small caps.
Note – We are still trying to understand how cyclical stocks work and how empirical ratios like P/E, P/BV can be used to enter such stocks at levels which may not be lowest, but somewhere below historical averages.

Miscellaneous / Speculative / Special Situations related bets
This would form 0-5% of the portfolio.
This would comprise of stocks which
          Are preferably from large cap category. But may be from any of large, mid, small or micro cap categories.
This would comprise of stocks in high risk – high reward category. We would never take blind bets based on tips given by others (read traders – We hate them so much!!). We would analyze the business behind the stock to see whether risk reward ratio is skewed towards reward or not and then take sensible calls.
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When would you buy stocks for DMP?


Though it’s a tough task to time the markets, the fact remains that one should invest when there is over pessimism in market. In one of our earlier posts, we tried to decipher whyaverage investors like us should be concerned about entry price of stocks. Here also, we share a few guidelines to help us make buying decisions, a little quantitatively.

·         Dividend Core
          When stocks are trading closer to their 2-3 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.
          When P/E x P/BV < 22.5 (Graham’s)
          When stock features in top-20 lists made on basis from High ROE and High Earnings Yield (Magic Formula)
          When Dividend Yield of stock crosses 5% without any substantial negative change in fundamentals

·         Growth Oriented
          When stocks are trading closer to their 1-2 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.

·         Large Cap
          When stocks are trading closer to their 2-3 year lows
          When stocks are trading in PE & P/BV range of Lowest & Average of-last-5-to-10-years.
          When P/E x P/BV < 22.5 (Graham’s)
          When stock features in top-20 lists made on basis from High ROE and High Earnings Yield (Magic Formula)
          When overall markets are trading at low multiples of P/E, P/BV & Dividend Yield, as detailed in an earlier post.

·         Cyclicals
          Note: We are still trying to understand how cyclical stocks work and how empirical ratios like P/E, P/BV & Dividend Yield can be used to enter such stocks at levels which may not be lowest, but somewhere in a range, which skews the risk reward ratio in favor of rewards.

·         Miscellaneous / Speculative / Special Situations related Bets
          Need to be analyzed on case by case basis.
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When would you sell stocks in DMP?

Though we hate selling stocks, there may and will be times when the very reason which resulted in a buying decision, ceases to exist. This would require selling some shares in DMP. We will work on selling triggers for our portfolio soon. As of now, we don’t plan selling what we own, and don’t plan buying what we would like to sell in the next 10 years.
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In the event of temporary downward movement in a stock’s price, would we be happy to buy more shares?

If we have free funds which we do not require for next few years, we would definitely be interested in averaging down our costs. But this would be done after confirming that fundamentals of stock remain good enough and there are no fresh triggers for us to sell the stock. Some investors may be unwilling to pick up more shares of a particular stock, even when the opportunity to buy discounted shares is presented.  We would rather treat this opportunity as a discount sale of stocks which we would love to buy.
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Is there just one Dead Monk’s Portfolio or multiple versions?

Dead Monk’s Portfolio is a reflection of our thoughts. It is built around our risk profiles, understandings of markets & our own strengths and weaknesses. It will not be exactly same as ones maintained by the two of us, as we maintain a total of 4 portfolios (2 personal and 2 for our families). But since Stable Investor is a journal of our learnings in portfolio maintenance, sooner or later, our personal portfolios would come in line with what we learn here. Therefore, to keep things simple, we will have just one DMP.
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Do you maintain a buy list of stocks at all times?

Absolutely! We would prefer that any stock which we buy should first enter our buy list and then our actual portfolio. A buy list also helps in tracking multiple companies which we may be interested in future. Keeping a rough record of such companies from the start is necessary as the price may not be right at the time when we first analyse a company.
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How do I track Dead Monk’s Portfolio?

We are putting up a dedicated page for easy tracking of DMP. All posts related to DMP and latest portfolio snapshot can be found there.
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Do you have anything else to share?

We have a personal experience about large and mid caps. There are times when due to lack of any trigger worthy news and discussion in media, a stock tends to go down without any significant change in fundamentals. These are the times when one can accumulate these blue chips.

According to WB, as an investor, our goal should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now. Over time, we will find only a few companies that meet these standards. We must also resist the temptation to stray from these guidelines: If we aren’t willing to own a stock for ten years, we shouldn’t even think about owning it for ten minutes. We should aim to put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.

One should “never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”
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What is this Dead Monk’s Disclaimer?

Dead Monk’s Disclaimer: No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.
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