Rethinking Dead Monk’s Portfolio – Part 2

We are in process of making an annual assessment of our Dead Monk’s Portfolio. In our last post, we tried to questioning portfolio structure. We eventually arrived at a conclusion that Core-Satellite structure has worked for us and we are going to stick with it. But we have made slight adjustments to it. We now have a simpler SATELLITE structure. For more details about the new modified portfolio structure, please refer to this.


Do we need more dividend stocks?

In previous post, we mentioned that we might need to find new dividend stocks for the CORE of the portfolio. This was to stay prepared for possible exits from existing positions and to maintain the dividend income levels from the portfolio. We are almost through with our stock selection and we feel that inclusion of new dividend stocks may not be necessary at present. Reason? Apart from 5 stocks which will form our dividend core, the stocks forming part of the Large Cap Satellite themselves have decent dividend yields. Add to this the fact that a pick in Growth Oriented Satellite comes from energy sector and has recently announced a promising dividend policy.

We have chosen 13 stocks for DMP. Out of these 8 stocks have a known history of paying generous dividends to the shareholders.

dividend history
Dividend History
Do we need to have stocks from every sector?

The answer is a big NO!! The chosen 13 stocks belong to just 4 sectors. These are sectors and industries which we are comfortable with.

Energy – 4 companies
Chemicals – 1 company
Financials – 4 companies
FMCG – 2 companies
Others – 2 companies

sector allocation in stock portfolio
Sector Allocation
At present, we are not very comfortable with FMCG sector valuations. But we have still chosen 2 stocks from this sector because this is a portfolio, which can be kept for years, if not decades. But we do believe that currently, FMCG stocks are good businessesto buy, but not at current valuations.

Another thought which bothered us was that we regularly come out with list of stocks like 10 Stocks to buy in next market corrections & 13 Great Indian businesses. Wouldn’t it be a wise idea to have a few of those stocks in this portfolio? This concern has been addressed in the new portfolio and a number of stocks from these lists have found their way to Dead Monk’s Portfolio. 🙂

We have intentionally not chosen specific stocks for cyclical section of the portfolio because these stocks would be bought and sold at regular intervals. We do not plan to hold them for decades at a stretch.

We would share the portfolio composition in our next post.

Dead Monk’s Disclaimer – As an investor, we can never eliminate the risk of being wrong.

_________

Advertisements

Rethinking Dead Monk’s Portfolio – Part 1

Almost an year back, we came out with our strangely named portfolio – The Dead Monk’s Portfolio. For those who don’t know about the origin of this name, we suggest you read this.

 
Though one year cannot be referred to as long term, we thought it was a good time to re-evaluate the ideas / concepts / principles on which we built this portfolio. We are still learning from Mr. Market and we are ready to accept our mistakes and take into account certain new developments.
Portfolio Structure
 
Structurally, we think that Core – Satellite approach works fine for us. It allows us to focus on creating an ever increasing CORE of dividend paying stocks. This core periodically generates cash to fund purchases for SATELLITE stocks.
 
In the new structure, the CORE remains same. It would consist of 4 to 5 dividend stocks. This part of the portfolio would form about 50 to 60 percent of the entire portfolio.
 
There is a small change in the SATELLITE part. We continue having sub – sections of Large Caps (15-20%) & Growth Oriented Stocks (20-25%). But we have decided to merge the Miscellaneous, the Cyclicals & the Speculatives Section. This part of the portfolio would now form less than 10% of the entire portfolio. We are doing this to simplify the structure. Another reason is that the cyclical stocks & other short term bets can increase the volatility of the portfolio. It is best to combine them into one section and put an upper cap on their weightage. This would also help in reducing the emotional purchases if (& when) we are tempted to do so. So the new structure stands like this –
stock portfolio structure
New Structure – Dead Monk’s Portfolio
Portfolio Composition
 
We would have loved to hold hundreds of great stocks like Peter Lynch. But we don’t have a team of analysts to help us out. And neither are we Warren Buffet nor Peter Lynch. 🙂 Therefore, we stick to our earlier approach of keeping the number of stocks to less than 15.
 
As far as individual stocks in the DMP are concerned, we prefer not being judgmental of the price performances after just one year. Some stocks have done good. Others have been pathetic. But there are a few, whose poor performance is because of the change in fundamentals of the business. We need to take a call about them.
 
We also need to find new dividend stocks for the CORE of the portfolio. This is to stay prepared for possible exits from existing positions.
 
Another issue which we felt needed some addressing was that though we have tried to stay within the sectors which we understand (circle of competence), we feel that this makes the portfolio skewed towards one or two sector (energy, commodities, banking, etc). Hence, we also need to decide whether to choose stocks from other sectors like FMCG, auto or not.
 
Another thought which is bothering us is that we regularly come out with various list of stocks like 10 Stocks to buy in next market corrections & 13 Great Indian businesses. Wouldn’t it be a wise idea to have a few of those stocks in this portfolio?
 
We will try to answer most of the questions in next part.
 
Dead Monk’s Disclaimer – As an investor, we can never eliminate the risk of being wrong.
 

Power of Compounding – When your money works for you rather than you working for money

Power of compounding can be experienced, when your earnings start generating more earnings. You receive interest not only on your original investments, but also on any interest and dividends that accumulate. This way, your money can grow faster and faster, as years go by.


Let’s take an example:

Let’s say you have 2 separate accounts having Rs 1 Lac. Each account earns 8% every year. In first account, you withdraw your investment earnings each year and the value of the account stays steady (Red Line in chart). In other account, you don’t cash out your interest earnings, i.e. they get reinvested. The curved green line shows the power of compounding and time. If you keep reinvesting the interests, after 40 years, your investment will have grown to more than Rs 20 Lacs.

Compounding of interest
In this way,it would be your money working for you rather than you working for money. And this will make a huge difference to your future account balance.

Note – This is a hypothetical example, and actual returns would be different, depending on change in interest rates and other factors.

Additional Note – If you are amazed by this concept of money working for you (wow!), then you might also like to read about the power of doing nothing in stock markets and story of an Indian multibagger 

______

Cairn India: A dividend stock to buy for long term?

Vedanta controlled Cairn India has declared its maiden dividend of Rs 5 per share (of face value Rs 10). In April 2012, Cairn India had approved its dividend policy, which aimed at payout of around 20% of its annual consolidated net profits.

Cairn India Stock
Regular readers would agree that we have been openly advocating dividend investing for building long term wealth (Why?). So, though Cairn India has declared its very first dividend, is it a good candidate for dividend investing?

We think it is. Our arguments:
  • While selecting stocks to hold for long term, we had chosen Cairn for its growth potential. The company is still in its initial stages and is looking to ramp up its production. It has investment plans of $600 million over the next two years in Rajasthan exploration blocks, which will increase output from those oilfields. Any ramp up would eventually lead to increase in revenues and profits. This was our initial logic for putting Cairn in our long term Dead Monk’s Portfolio; i.e. we were looking at Cairn for its growth.
  • Cairn has now declared that it would pay 20% of its annual profits as dividends. When we compare this to its peer ONGC, we find that on an average, ONGC’s dividend payout is around 33%. This is more than what Cairn plans to pay. But ONGC’s oil fields are mature and scope for production increase from existing oil fields is low. Hence, with lower planned investments in existing fields, ONGC shares ‘more’ profits with its shareholders. On the other hand, Cairn India is a growing company. It is keeping more funds for investment in increasing its production. This approach is totally in line with a normal growth stock. Lower dividend payouts and higher investment in business. While deciding the quantum of payout (20%), the company has kept in mind the twin objectives of stable dividend payout and investment for growth.
  • So will Cairn continue paying dividends? At rates atleast 20% of net profits? Common sense says Yes… Otherwise it would hurt investor’s sentiments if company decides to change its dividend policy (reduce) or refrained from giving any dividend in later years.
  • With ONGC, a mature oil company commanding a multiple of x9.2 and a growing company like Cairn commanding x6.0, it appeals to common sense to start buying Cairn India for long term.
  • Generally, oil exploration companies world over are cash rich and have generous dividend payout policies. So, Cairn India, growing at present, would (most probably) increase its dividend payout upwards from 20% at present, once it business stabilizes and oilfields mature.

All in all, Cairn India seems a potentially good stock to hold for dividend as well as growth potential. Please note that our views may be biased as we hold both these companies in our personal long term portfolios.

Disclosures: Hold Long term investments in ONGC, Cairn India.

______

Power of doing nothing in stock markets – Indian Stock Markets Perspective

A study found that a goalkeeper who stands in the middle — the stock market equivalent of doing nothing — has better success than one who tries to guess which way a free kick will come. It was found that goalkeepers jumped to the left or the right significantly more than was useful in preventing goals. In fact, they jumped an overwhelming 94 percent of the time – meaning they stayed in the middle only 6 percent of the time. In comparison, the shot went towards the centre 29 percent of the time. Goalkeepers, it seems, could achieve more by doing less.

 
 
 
Similarly in managing stocks in your portfolio, it is often best to stay in the centre and do nothing. Sitting put on your index funds & dividend stocks, not trying to find the bottom & most importantly, not panicking, serves an investor better than trying to guess and time the markets.
 
Experts (though you should not believe them blindly) agree that investors will be better off resisting the temptation to make changes to their long-term investments simply because of short-term stock market movements. If your personal circumstances and financial goals haven’t changed, and you are still interested in being invested for the long term, then it is probably appropriate to ‘do nothing’.
 
To test the benefits of doing nothing in Indian markets, we analyzed the data for last 20 years. We specifically looked at 5 & 10 year rolling returns (CAGR) of Sensex (index) to understand whether it made sense to invest once and sit through years doing nothing?
The results are shown in graphs below –
 
Click to enlarge
Returns on rolling 5 Years
  • Average 5 years returns have been a good 11.8% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 5 years, your money would have grown at a rate of 11.8% every year (Doubling in just over 6 years).
Click to enalrge
Returns on rolling 10 Years
  • Average 10 years returns have been a good 10.9% pa. i.e. if you invested some money in index (Sensex in this case) and did nothing for next 10 years, your money would have grown at a rate of 10.9% every year (Doubling in just over 6.5 years).

Now these two figures of 11.8% & 10.9% are not earth shattering, but if maintained for decades, they have the potential to make investor following do-nothing approach, super rich.

 
Summarizing our finding in table (below), we found some interesting things –
 
  • In all we had 201 Five-Year Periods. Of these returns earned in excess of 10% were 91 of those periods. i.e. 45%
  • The buy and hold strategy (for 5 Years) beat long term average of 11.8% a good 37% of the time.
  • For Ten Year Periods, we had a fewer 141 periods. Returns earned in excess of the long term average of 10.9% were a brilliant 59% of the time. i.e. If you stayed invested for 10 years and did nothing, chances of beating the long term average were a high 59%.

And you thought that buying and holding did not work! 🙂

 
So does it mean that Doing-Nothing works? We would say that it does, but only if you are ready to follow it for long term. And long term means years (decades) and not months. Frankly, there doesn’t seem much point in overanalyzing, overthinking, and exhausting oneself by trading in the short term. We must understand that it is TIME and NOT TIMING that is the key to successful investing.

Do Indian stock markets bounce off PE levels of 12 & 24?

Confession time… We are obsessed with P/E Ratios. Now this statement itself would shoo away a lot of intelligent readers. As a reader, you should understand that we have a bias for simple tools/ratios like PEs, PBVs & Dividend Yields. But if you are still reading this sentence, we assume that you too are interested in simplicities of stock investing.

In a post done in May 2012 about PE, PBV & DY Analysis of Indian stock markets and how you can benefit from them, we found that investing in markets trading at low PE multiples resulted in increased probability of higher than average returns (Click hereto see how).

Just to re-check this conclusion, we decided to re-evaluate Market Movement in relation to PE levels of 12 and 24. We plotted the data on a chart (below) and were pleasantly surprised!

Click to enlarge
Though above chart looks like a screen from trader’s terminal, it’s actually a rawdisplay of benefits of fundamental law – Buy low (PE). Sell high (PE).

The blue line is actual index’s (Nifty50) movement during last 13 years

The red line is theoretical index levels at a PE = 24

The green line is theoretical index levels at a PE = 12

Assumption – We believe that a growing economy like India is undervalued at PE=12 and overvalued at PE=24. (You may differ on this).

As we can see, whenever the actual index touched the green line (PE12), shown by green bubbles, it bounced off considerably (Major Gains were recorded).

Similarly, when the index touched the red line (PE24), marked by red bubbles, it generally resulted in actual index falling considerably (Major losses were recorded).

So would it be safe to say that index bounces off PE levels of 12 and 24?

The author discussed this conclusion with a close friend and was well advised to look for other combinations of high and low PEs as well. We reserve the analysis of other PE combinations for our next post. In this post, we would do some further calculations using just two combinations PE12_&_PE24 & its more conservative subset PE14_&_PE22. Instead of just keeping our calculations limited to 12-24 zone, we chose 14-22 as an additional level. The reason is that levels of 12 & 24 are rarely achieved. They are very rare. So an investor may not get many opportunities to take his calls at these levels. In comparison, levels of 14 and 22 are more frequently seen in the markets, giving ample decision points to an investor. So here is what we found –

  • Starting with Rs 10,000, we invested in index when it first touched PE12 and sold out completely when it first touched PE24. Now we waited for markets to correct to levels of PE12 and invested all proceeds from our previous sale. Again we sold off completely at PE24. The process was repeated as long as possible.
  • We repeated similar exercise with PE levels of 14 and 22. We bought at PE14 and sold off at PE22. The resultant data is tabulated below.

  • As you can see, buying at PE12 and selling at PE24 resulted in just 6 transactions in last 13 years!! But returns have been a phenomenal 26% i.e. Initial amount of 10K has increased to 198K!!
  • Similarly, for PE14 & PE22, returns have been a great 18.8%
  • This type of investing may require a lot of patience as we only make 6 transactions in 13 years, i.e. one transaction every two years!!

We are pleasantly surprised by these results. Is it so easy to earn a 25% pa return for more than a decade?? Our answer would be a big NO. Reason, as already mentioned, is that we need to check the data for other PE combinations. We also need to assign a lesser weightage to the great Indian Bull Run of 2003-2008 (which may not be repeated in years to come). We also need to see if such trends are visible in other markets. But that part of discussion is reserved for another day. For the time being, enjoy the simplicity and so-called amazing returns of our proposed approach. 🙂

_________

Did you like what you just read?

Then please subscribe to our feed AND spread the word by liking our page on Facebook. Thanks.

15 stocks to buy for long term in india – Dead Monk’s Portfolio

We recently wrote a post detailing rules for Dead Monk’s Portfolio (DMP). Therein, we mentioned that we plan to divide DMP into different parts i.e., core and satellite(s). This approach will help in addressing requirements of dividend income, capital appreciation & long term stability.

But before delving deeper into DMP, you must understand that it is built around our risk appetites, our understanding of markets & our strengths and more importantly, weaknesses. Since it is born out of our personal vision for ourequity portfolio, DMP will always be like a magic mirror for us. It is there to show how our equity portfolio should look and be like.

And since your risk appetite and investing style may differ from us, we suggest that you use DMP as a snapshot of what stocks we own / plan to own in our long term portfolio. This should not be taken as an investment recommendation from us.

So have a look at DMP below…


To put on record, we are very risk averse (atleast the author is) J. The author still holds a large part of his assets in fixed deposits, mutual funds & cash. At present, equities form only 10% of the overall portfolio. You won’t be wrong in thinking that these guys are running a blog on stock investing and themselves have only 10% of their money in stocks! But low levels of equity exposure are due to our past financial commitments. But slowly moving out of that phase, we now plan to increase our equity exposure. And we won’t be boasting if we were to say that this time, we are far more structured than we have ever been (Boasting 😉 (Read details of portfolio structure in previous post)

After DMP has been applied, this is how author’s investment portfolio would look like:
  • 4-5 Dividend Stocks (~ 50% 0f equity portfolio)
  • 8-10 Large Caps + High Growth Potential Stocks (~ 30% of equity portfolio)
  • 4-5 Cyclical / Risky Bets (~ 20% of equity portfolio)
  • 2 mutual funds (ongoing SIPs – Large Cap & Multi Cap)
  • 2 planned SIPs to be started in 2012 (Mid & Small Cap) & 2013
  • Fixed Deposits
  • PPF

Note – Author has a few financial liabilities and has secured them by a couple of term insurance policies.


Author plans to invest whatever he saves every month (& receives as dividends) in a few of these 15-20 stocks.

But how to decide when to invest in these stocks? Should they be bought at current levels?

We will try answering this question in our next post which would be based on Warren Buffett’s quotation – “Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results.”

We will also weigh these stocks on parameters like P/E, P/BV, Dividend Yield, dividend growth, PEG ratio, etc and try to arrive at intrinsic values, graham’s number etc.

We also plan sharing our stock watch-list. This contains stocks which may form part of our portfolio in future.

Please remember that we will never suggest you to blindly go ahead and buy the stocks from the above list (or even include these in your personal watch list). Reasons is simple and explained by 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.

PS – ’15 stocks’ in title refers to all stocks mentioned except cyclical and miscellaneous ones. 
_________

Did you like what you just read?

Then please subscribe to our feed AND spread the word by liking our page on Facebook. Thanks.

Dividend Investing in Indian Stocks

A poston The Motley Fool inspired us to write about dividend investing in Indian stocks.
They say that if a person plans to have a long term portfolio of 10 stocks, atleast 3 should be good dividendpaying stocks.
Companies generally pay dividends when they have stable, predictable cash flows and don’t have troubles covering their dividend obligations. So when you invest in good dividend paying companies, it can be safely assumed that the chosen company is there for the long run.
A talk on stock dividends generally leads to further discussion on its Current Yield (Ratio of Dividend Paid & Current Market Price in percentage terms). Read more about Current Yields here. We will again take up yields later in the post.
It is important for a long term investor that when he selects a stock for its dividends, he looks beyond just its current yield. What a stock pays as current dividend is not as important as its future dividends. It is also important that dividends are sustainable & keep coming year after year.
One interesting concept given in The Motley Foolis about Effective Yield – Dividend Yield measured by referring to the original purchase price. Even if a stock carries a modest yield when you buy it, rapid dividend growth can boost your effective yield very quickly, making it much more attractive.
To indicate the relevance of Effective Yield, we take up Clariant Chemicals (I) Ltd. (BSE Code: 506390), a mid cap known for generous and increasing dividend payouts.
In April 2007, Clariant paid a dividend of 180% (at face value of 10). At a then market price of Rs 300, it translated into a yield of 6%. Come FY 2011 & it paid a total dividend of 100% (Interim) + 200% (Final). This translates into a Current yield (CMP – 650) of 4.6%. But if we calculate the effective Yield (@2007 Purchase Price), we have an effective yield of almost 10%. This effectively means that by means of increasing dividends alone, the stock would be able to pay back the investment in less than 10 years!
So what does dividend investing offer to a Stable Investor?
Dividend Investing can help Stable Investor generate an ever-increasing stream of cash. This cash can then be deployed to buy more such assets and so on…
An important point is that one should not be fooled by high dividend yields. The reason for high yield may be a sharp fall in market prices or a one-time special dividend payout. It is very important to focus on sustainability of business when one is investing for dividends. There is no use investing in business for dividends, when the company is not in a position to exist after some time.
The Motley Fool has another insightful post on successful dividend investing that can be found here.
Like what you read, subscribe to Stable Investor.