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Interview with John Huber – Part 2

John Huber Basehit Investing Interview


You can read Part 1 of this interview here.


Dev: As a long-term investor, how should one control oneself to not to panic? Also, when should one panic (say, panic to buy more when markets falls a lot)?

John: This just comes from maintaining a discipline about your investment philosophy.
I think it’s helpful to keep in mind that stocks aren’t trading vehicles, but pieces of real businesses. And if you’re buying a business that produces x amount of cash flow, the lower the price, the better.
As Buffett says, whether it’s stocks or socks, we like buying merchandise when it’s marked down.


Dev: I am a conservative investor who focuses a lot more on Return of Capital than on just return on capital. Though every individual’s risk and investing profile is different, do you think that focusing on mistake-reduction is what investors should focus on? Or lets say that just like in the game of Tennis, its best to first work towards reducing unforced errors. Does it help in winning the game of investing too?
John: Absolutely. I think the vast majority of investment mistakes come from “stretching” too far for upside potential at the expense of downside risk.
The tennis analogy is a good one—amateur tennis players win matches not by making the most forehand winners, but by making the fewest mistakes. Just hit the ball over the net. In investing, it’s very difficult to make up for losses. So keeping a relentless focus on preventing losses has always been at the core of my investment approach.
To use one more sports analogy—focus on base hits, not home runs.


Dev: As an investor, hardest thing about investing is to find a balance between 1) riding out periods temporarily unfavorable to your views and 2) realizing your views are wrong and moving on. How should an investor maintain that balance?
John: This varies case by case, but certainly you have to be honest with yourself. If you’ve made a mistake (which all investors do, and will continue to do), you should be honest in your assessment, sell the stock, and move on.
Of course, the market is volatile so sometimes general market conditions take all stocks lower, and this volatility might have nothing to do with the intrinsic value of stocks in your portfolio.
So company specific situations should be differentiated from general market volatility.


Dev: In his book Thinking, Fast and Slow, Daniel Kahneman talks about two approaches to thinking. System-1 (which is fast, instinctive and emotional) and System-2 (which is slow, effortful and calculating). How can an investor make use of these two systems to invest? At the face of it, System-2 seems like a better choice. But are there any market situations, where thinking in System-1 mode can work wonders for long-term investors?
John: I’m not very familiar with Kahneman’s work, although I’m familiar with his ideas you referenced.
I think generally speaking, my style of investing falls very much in category #2. Thinking logically, rationally, and patiently has always been beneficial to me.


Dev: Do you think lack of preparedness is what causes most investors to miss out on wealth creation opportunities in stock markets? (Both mental as well as financial preparedness)
John: I think that has a lot to do with it. But I think the biggest reason investors probably fall short of what they hope to achieve is lack of discipline (selling during downturns, and buying when outlooks are more optimistic). Generally, investors need to do the opposite to do well over time.
For people with full-time jobs and excess earnings, building wealth is a very simple formula.

Spend less than you earn, and invest in a basket of good businesses (or a broad index fund) over long periods of time.

In America especially, earnings of S&P 500 companies will be much higher 10 and 20 years from now, dividends will be two or three times the levels they are now collectively, and stocks will be much higher.
Dollar cost averaging works – as long as you’re not buying into bubble-level valuations (like 2000). Try to buy stocks when they are down, save more than you earn, and you can’t help but become wealthy over a working lifetime.


Dev: How do you manage your own money? Funds? Direct Stocks? How do you go about it?
John: I invest in stocks. Saber’s strategy is to buy well-managed businesses with stable competitive positions, predictable cash flow, and high returns on capital. I try to invest in these high quality compounders when they are priced well below my estimate of their fair value (or the value a private owner would pay for the entire business).
Because of my standard of looking for both high quality and discounted price, I tend to only invest in a small group of stocks at any given time.
I feel that owning a few things that I understand very well is much less risky than owning a lot of things that I don’t know so well.


Dev: What is your advise for those who are just starting their investing journey?
John: Read about value investing – specially Warren Buffett. I think the simple logic of value investing makes intuitive sense, and it works over long periods of time.
I think investors who don’t have time to manage their own money should invest in index funds, or possibly with an investment manager who uses a straightforward value investing approach, but the best way to learn is through practice.
Those who want to learn to manage their own investments should get in the habit of reading a lot. Study Warren Buffett’s letters, and begin reading company annual reports. Knowledge is cumulative, and it’s possible to do well in investing with the right approach combined with the right temperament.


Dev: For most common investors, it’s suggested that they should Dollar-Cost Average through mutual funds. Not trade much in individual stocks. Buy some shares directly here and there. Tell me what is wrong about this that these people fail to understand?
John: I believe this is good advice generally, but I would say that instead of mutual funds, I would prefer most investors using simple, low-cost index funds (ETFs). These are similar to funds in that they are diversified with hundreds of stocks, but different in that they are passively managed (they are designed to match the performance of an index, such as the S&P 500 in the US).
The costs of these index funds are much lower than the cost of actively managed funds. Of course, a good investment manager can outperform the index over time, but these managers are rare and it’s often easier to focus on just putting money into one or two diversified passively managed index funds.
Dollar cost averaging simply means putting more money to work over time, and I think this is a good approach for working people because they are steadily getting more money each month from their paycheck. Some months will be making purchases at higher prices, but some months will be at lower prices.
This mechanical method is helpful because—if one sticks to it—can help you be disciplined when bear markets (and fear of stocks) come around again. That is the time to buy as much as possible.


Dev: As someone who spends his day in midst of financial data and news, how do you filter out what is good and what is not to get to your daily reading list? How to become a good consumer of financial content?
John: I generally stick to my routine. I get up each day at 5am, read the Wall Street Journal (and sometimes a few other papers), and then (after spending an hour helping my family/kids get ready for the day) I begin working on whatever research project I have going on at the current time.
I don’t pay much attention at all to mainstream media (CNBC, Bloomberg, etc…). I spend most of my time reading primary materials (company reports, industry reports, trade magazines, etc…). I also make phone calls to people to learn more about businesses, but most of my time is spent reading. So I pretty much stay away from mainstream business media.


Dev: What is your daily reading list?
John: Wall Street Journal, Economist are daily reads (Economist comes each week, but I read a few articles each day).
I also read NY Times, Financial Timesand a few other papers, but not necessarily daily.
But most of my time is spent reading about companies through books, annual reports, industry research, etc… this varies from day to day, but each day involves a lot of reading.


Dev: 5 quotes that should be framed and put on every investor’s desk?

John:
  • There are two rules of investing: #1: Don’t lose money. #2: Don’t forget rule #1. – Warren Buffett
  • I will tell you how to become rich: Be fearful when others are greedy, and be greedy when others are fearful. – Warren Buffett
  • An investment in knowledge pays the best interest. – Ben Franklin
  • Just practice diligently and you will do very well. – Johann Sebastian Bach
  • And the one thing that all those winner bettors in the whole history of people who’ve beaten the pari-mutuel system have is quite simple. They bet very seldom. – Charlie Munger
  • It’s not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it – who look and sift the world for a mispriced bet – that they can occasionally find one. – Charlie Munger (an extension from the previous quote).

Dev: 5 books that everyone looking to become better investor must read. Atleast one each from domains of building processes, psychology and financial analysis.

John:

Dev: Lastly, I know this might sound funny, but how to find a company like Google, Apple, Tesla, Berkshire, etc. early on. And more importantly, how to have the conviction to stay with them?
John: This one is tough. We should all be so fortunate to find one of these in a lifetime, but most of us won’t. The good news is, you don’t need to find the next Google or Microsoft to become a very good investor over time.
I’m not sure there is a specific way to describe how one could locate such an investment.
It’s part preparation, paying attention, working very hard, and learning about a variety of companies.
But to find an investment of the kind you mentioned, it’s also part luck – being in the right place at the right time.
If you find such a great business, it takes discipline and foresight to stick with it through periods of seemingly overvaluation and short-term underperformance.
It’s hard to specifically set out to find such an investment. I think focusing on working a specific investment process is a better approach. Look for base hits, and maybe one day you’ll come across a home run idea.

Ben Graham made 20% per year buying bargains, and then happened across GEICO, which made him very wealthy. He had many base hits, and one home run. But the home run wasn’t necessary to produce.


Dev: That’s all from my side John. I thank you for answering my questions. It was wonderful to have you share your insights.

John: Thanks Dev.




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Interview with John Huber – Part 1

John Huber Basehit Investing
John Huber is portfolio manager at Saber Capital Management and author of the popular investing blog Base Hit Investing. In his own words, his investment style (which is amazingly methodical) is influenced by Warren Buffett, Ben Graham, Walter Schloss and Joel Greenblatt.
 
I have become a big fan of his writing and thought process, ever since I came across his blog and strongly recommend it to anyone interested in following a structured approach towards investing and improving as a rational thinker.
 
I thank John for agreeing to get interviewed for Stable Investor.
 
So lets get straight to the interview now…



Dev: Hi John. Tell me something about your investment journey. How did you get to where you are?

John: I’ve always loved investing. My father was an engineer by trade, but was very active in the stock market (investing his savings) and by extension, I became interested in stocks.
 
But I came to the world of investment management unconventionally. I began my career in real estate, and I established a few small partnerships with family members and friends to begin buying undervalued income producing property. We bought residential properties as well as small multi-family properties.
About ten years ago, I began studying the work of Warren Buffett. Like many value investors, the simple logic of value investing really resonated with me right from the start.
 
I began studying Buffett’s letters, and reading various Buffett biographies. I set a goal early on to establish a partnership that was similar to the partnership Buffett set up in his early days.
 
After a number of years, I was fortunate to build up enough capital to support my living expenses while also seeding my investment firm. Saber Capital Management was established in 2013 as a way for outside investors to invest alongside me. Saber runs separate managed accounts, so clients get the transparency and liquidity of their own brokerage account. Our goal is to compound capital over the long run by making concentrated investments in well-managed, high quality businesses at attractive prices.
 
Dev: I know you focus a lot on having a process-oriented approach towards investing. How should one go about creating and refining one’s investment process?
John: It’s a great question. I think developing an investment philosophy is very important.
 
There are many different investment approaches out there — even within the value investing category. I think it’s important to first identify an investment program that will work (value investing — or buying stocks for less than what they are worth) works over time.
 
But I also think it’s important to understand your own personality, your own skill sets, and your own circle of competence.
Look at Benjamin Graham and Charlie Munger as an example. An approach that worked for Ben Graham was a completely different approach that ended up working for Charlie Munger, yet both were fantastically successful. But they both had different skill sets and preferences.
Graham loved numbers, he loved the mathematical aspect of investing. He thought of a portfolio like an underwriter would think of the insurance business—buying stocks for less than their net asset values worked collectively as a group over time, but any one individual situation was difficult to predict (just like insuring 1000 automobile policies with a given set of underwriting criteria would lead to very predictable results—although on a case by case basis it would be very difficult to predict which driver would end up making claims). So Graham’s preference for these investment tenets led him to manage a diversified portfolio of value stocks.
On the other hand, Charlie Munger became fascinated by great businesses. He wanted to own companies that could compound at high rates of return over long periods of time. He loved thinking about the intangible qualities of great businesses.

He once asked an associate to write up an investment thesis on Allergan, and when the associate came back with a list of Graham-esque metrics, Munger told him to forget the numbers and research why the company had such an advantage over its competition.

He was interested in brands, pricing power, predictability of earnings, high returns on capital — things that produced growth and compounding value over time.
Both Graham and Munger were enormously successful in their partnerships—both producing around 20% annually over the period they managed money, but both did so in very different ways.

Neither were right or wrong in their approach, but both managed money according to their personalities.
I think if you first identify what works in investing, and then you tailor it to what you like and what you understand, you’ll do well over time.
Along with value principles, discipline, and patience, perhaps Polonius has some good words of advice when it comes to setting up an investment process when he told his son Laertes in Hamlet: “To thine own self be true”.
 
 
Dev: How to generate new investment ideas and more importantly, how to filter those Ideas?
John: I used to do a lot of screens and other mechanical methods to generate ideas, but I find the best way to look for good investments is just to read as much as possible, build watchlists of good companies that you feel you can understand, and then patiently wait for opportunities to buy stocks on that watchlist. Inevitably, if you have a list of 50 or so businesses, there are almost always opportunities on at least a few of them to make an attractive purchase of an undervalued stock.
So most of my time is spent reading about companies and trying to always increase my understanding of the companies I follow, while also slowly expanding my circle of competence.
 
I read a lot of company annual reports, but I have also found a lot of value reading books about businesses, or books about general industries. I also read numerous newspapers, and the Economist.
Often, investment ideas come from situations that occur within companies on my watchlist that I already know well. Other times I read about a special situation or corporate event in the news that might offer an interesting investment idea.
 
So while my method isn’t scientific, my routine is quite replicable, and it basically involves a lot of reading and thinking. I would say that it is an approach that helps me always be tuned in to a variety of interesting situations where opportunities often pop up. But most importantly, it’s an approach that helps me continually learn, and I enjoy that aspect of investing.
Dev: Do you believe in importance of having an investment checklist?
John: I do think having a checklist can be a very valuable exercise. I’ve discussed checklist items before, but I’ve also adapted this point of view in recent years as well.
 
While I consider various checklist items when evaluating a business, I have found that because each investment situation is so different, that unlike flying an airplane that requires the same multi-point checklist before each flight, each investment is like a snowflake—it is unique and not exactly like any other investment.
 
So while I’m 100% sure that studying case studies is a valuable exercise (especially investment failures of great investors — something Mohnish Pabrai discusses which is a great idea), I’m not sure that a single checklist will be suitable for each investment idea. 

Studying why Dexter Shoe was a bad investment is a very valuable exercise. But the lessons learned from that case study might not transfer directly to another investment situation with its own unique set of variables.
So I don’t have a practice of running a bullet point mechanical checklist, although I think that might work for other investors and it’s certainly not a bad idea.
 
Instead, I choose to try and locate investments with very few variables that are required for the investment to be a success. I try to identify those variables, and then evaluate them over time as the investment plays out.
I think studying case studies probably helps you build a mental database of checklist items, so maybe indirectly we all have checklists as investors, but I choose to focus on each individual investment as its own situation with its own set of variables, and I try to reduce risk as much as possible by locating ideas with very things that can go wrong. The lower the hurdle, the better I like it.
 
Note – John has agreed to share a checklist which he prepared few years back. Below is the snapshot of the checklist. Though he doesn’t strictly follow the checklist approach anymore (as discussed above too), it can still be a great starting point for those who are setting out to build their own checklists. You can read about it in detail here.

Dev: It’s very easy to say that investors should only invest when value on offer is blindingly more than the price that needs to be paid. But how does one implement that in reality? Being greedy when others are not, is actually quite difficult to do.
John: As I said before, each individual investment is different, so there isn’t necessarily an exact approach that can be implemented with each stock being evaluated.
 
But I think the first thing is to stick to businesses that you can understand. This is widely discussed, and highly touted, but I think it still might actually be under-appreciated. 
 
Reducing unforced errors in investing goes a long way to producing great results over time. And reducing mistakes comes from sticking to what you know, and picking your spots.
 
I think patience is a real virtue in investing, and over the course of time, there will be a number of opportunities to buy good businesses at prices that are clearly well below their intrinsic value. The key is to have a list of companies you know very well, and then just wait for one of them to fall significantly below your range of estimated values. Easier said than done, but being patient is very key.
 
It is also a necessity in investing to have a calm demeanor and a contrarian attitude in general — the market is often correct, so being a contrarian for contrarian’s sake alone isn’t rational, but you must be able to be detached from the crowd so that in times of general market panic, you are willing to buy stocks even when the near term outlook is bleak. This is also easier said than done, but it helps if you have a long-term view of stocks, and stick to owning good businesses that you understand well.
One other thing to point out—I’ve read the average NYSE stock fluctuates by 80% annually (meaning the 52 week high is 80% above the 52 week low for the average NYSE stock). This holds true across every index, and every country (probably much more pronounced in many countries than it is in the US).

Note – Check out a similar analysis on Indian markets here.

So stock prices are very volatile. There is no way that the average company’s intrinsic value fluctuates this much on an annual basis.

So this of course means that stock prices fluctuate much more dramatically than true values do, giving investors an opportunity.
And since these statistics refer to annual levels, it means that there are a lot of opportunities each year in the stock market to buy undervalued merchandise.
 
Dev: Joel Greenblatt (of Magic Formula fame) once said, “My largest positions are not the ones I think I’m going to make the most money from. My largest positions are the ones I don’t think I’m going to lose money in.” What are your thoughts on this?
John: I completely agree with this. In fact, my largest position right now is Berkshire Hathaway, which became my largest position in February (I wrote a post recently outlining my thoughts on Berkshire).

The stock doesn’t have tremendous upside as its capital base is so large now, but it has—in my opinion—virtually no chance of any permanent downside.
 
These are my very favorite investment ideas because they allow you to put a lot of capital to work with no risk, and I’ve found that often the market “corrects” itself sooner, meaning that sometimes 2 or 3 year return potentials occur in a year or less, simply because of general market volatility.
 
1) Don’t lose money.
 
2) Don’t forget rule number 1.
 
Trying to stick to companies you understand and sticking to businesses that are growing value over time helps reduce risk.

I think keeping a relentless focus on capital preservation is the best way to produce great results over time.
 
Dev: Another of Greenblatt’s idea has been to focus on the Key Variables of an Investment. He mentioned once that he might be average when it comes to the valuation exercise. But was above average at putting the information in context, remembering the big picture, and being able to pinpoint what factors really matter to an investment. How does an investor focus on what really matters?
John: I agree with Joel on this point as well. I think many investors get lost in the weeds — they become too focused on their models, their excel spreadsheets, or trying to predict what margins will be in 2019, etc.

I think gaining an understanding of the big picture is usually the most important objective when looking at a stock.
 
The big picture often means identifying the most important drivers of value in a business.
These value drivers could be things like cost advantages (Wells Fargo gathers deposits cheaper than just about every other bank), network effects (the more people that use Visa’s network, the more valuable it becomes), supply chain management (Amazon), economies of scale (Walmart’s leverage over suppliers), sometimes brands are very valuable assets (Nike, or even Apple for example), and sometimes it could be the management team that is just executing a business model well or is very adept at allocating capital (Berkshire Hathaway is an obvious example, but there are many companies that owe large portions of their success to the management team).
 
Many of these things can’t be measured by simply looking at the financial statements, so it helps to identify these things and keep them in mind when analyzing businesses, because often these big picture items continue to be the reasons for the company’s success going forward.
To be continued…

To Compare or Not to Compare

Few days back, I was analyzing my portfolio’s performance in 2015. Though I haven’t fixed an exact date for this annual exercise, I generally do it either in last week of December or first week of January.

Comparing Stock Portfolios

So once I was through with the exercise, I felt that considering it was a negative year for indices, my portfolio giving positive returns was good enough. I felt moderately happy.
Then I happened to have a chat with a friend who is also quite passionate about markets.
His portfolio did far better than mine. Infact his knack of getting in and out of markets regularly in 2015, resulted in him doing almost 10% better than me.
Now I was not as happy as I was before talking to him. 🙂
Its natural. I am a human.
Even though I was happy that previous year gave me some good opportunities to buy shares of good companies, somewhere inside me I had a feeling that I too would have loved to see my portfolio doing better than what I actually managed in 2015.
I know that it sounds like having the cake and eating it too. But this is what I felt. Nevertheless, I know one thing. It is not possible to beat the markets and everyone, every year.
Even Buffett can’t do it.
So why should I be bothered about doing better than everyone else?
As long as the average CAGR of my overall portfolio (MF+Equity) remains in line with my low expectations (which means I need to invest more every month and I am happy doing it), I should be a satisfied person.
I came across some contextually relevant lines while reading the 1990 Memo by Howard Marks (I planto read all available ones this year), where he said something that was comforting:
There will always be cases and years in which, when all goes right, those who take on more risk will do better than we do. In the long run, however, I feel strongly that seeking relative performance which is just a little bit above average on a consistent basis – with protection against poor absolute results in tough times — will prove more effective than “swinging for the fences.”
This made perfect sense to me. I am a firm believer of protecting the downside. Infact my bias toward Return OF Capital is so much more than Return ON Capital, that I regularly pass interesting but riskier opportunities.
As investors, we grossly underestimate the power having slightly-better-than-average performance over long periods. And as Marks say:
I feel strongly that attempting to achieve a superior long-term record by stringing together a run of top-decile years is unlikely to succeed. Rather, striving to do a little better than average every year – and through discipline to have highly superior relative results in bad times – is:
  • less likely to produce extreme volatility,
  • less likely to produce huge losses which can’t be recouped and, most importantly,
  • more likely to work (given the fact that all of us are only human).

Now when I say that I regularly pass riskier opportunities, it is because it would have required me to stick my neck out of my area of understanding (called circle of competence) and increase the chance of not knowing what to do if things did not fare as I expected them to. So it’s still possible that I might have had a better performance last year if I had taken those riskier bets.

But as Marks puts it, that bold steps taken in pursuit of great performance can just as easily be wrong as right. Even worse, a combination of far above average and far below average years can lead to a long-term record which is characterized by volatility and mediocrity.
Reading this memo clearly shows why there is no point in playing the comparison game. Being young, a 12% average return over the next 3 decades might be enough for me. For somebody else, even a 18% return might not be enough or satisfying or both. So as long as I don’t take too many risks and limit my direct equity investments to only high-conviction ones, I am sure that I will do just fine. 🙂
The best foundation for above-average long-term performance is an absence of disasters. I know all this sounds good in theory but is difficult in practice. But it is the truth and the reason why good investors do well.

A Short Story to tell why You shouldn’t Compare Your Portfolio Returns with Index Returns

There is a general trend to compare your portfolio returns with returns of popular indices like Sensex and Nifty. And this is not a recent phenomenon. It has been going on since years. Ask anyone and they will tell you that their portfolios have beaten Sensex by 5% or 10% year on year.

Here is a short but interesting story about why it doesn’t make much sense to do it:

Years back, there was a man searching for something under a streetlight. A policeman comes by and asks what he’s lost. The man replies that his keys are missing and he can’t get back into his house.

After a few minutes searching together, the policeman inquires whether the man is sure he lost his keys under the lamp.

No, the man replies, he lost them in the park.

“Then why are we searching here?” exclaims the officer.

“This is where the light is,” replies the man, continuing to search.

Story Investing Street Lights

That is the end of the story. Can’t get it?

Don’t worry. Read further…

The problem with evaluating relative performances is that you can’t get much out of relativity, i.e. you can’t eat relative performance. And the biggest problem with relative performances is that it ignores what an investor actually needs? Some investors invest for growth. Others might invest for generating dividend income. And many like me invest for a combination of the two. 

And comparing short term relative performances when you are investing for longer time horizons like 5 or more years does not make much sense.

And an index is not designed keeping in mind an individual investor’s needs. Remember that. So if you are comparing your portfolio performance with that of an index, then remember that index does not know that you use it (and not your actual needs) to judge your portfolio performance.

So if you really want to find your lost keys, you need to look where you’ve lost them, not where the light is (index performance). And if you want to know how your portfolio is doing, compare it to your actual needs and not any arbitrary index.

Note 1 – The idea for this post is sourced from here.

Note 2 – If you want  to read another interesting story about monkeys & goats and what they tell about stock markets, then you can read it here.

10 Stock PSU Banks Portfolio – 1st Year Performance Update

Caution: Lots of Graphs ahead. 🙂

Its been one full year since I started tracking PSU Bank stocks using a 10 stock portfolio. The catalyst for putting this portfolio in place was a feeling that PSU Banking space seemed relatively cheap (in November 2013) when compared to historical averages. I further hypothesized (or rather speculated) that over a period of next 5 years, this space would give better returns than broader markets.

And this speculative thought led to this portfolio and its quarterly tracking.

Portfolio Composition & Weightages

The portfolio which started off as an equally weighted one with all stocks sharing 10% of initial capital has moved a bit in last one year. It has now tilted more towards large caps due to better performance of larger banks than smaller ones over the last one year.
Banking Stock Portfolio Weightages
Current Banking Portfolio - Large Caps
Overall Portfolio Returns

So how has the portfolio fared in first year of its 5 year journey? To be honest, the results have been better than what I expected a year back. But that is not only because of low starting valuations or my stock picking skills. It is actually because of sudden rebirth of the Indian Bull Market. The portfolio has returned more than 42% (excluding dividends) and 45% (including dividends) in last one year. This is much higher than market returns of 35.8% in the same period.
Bank Portfolio Yearly Returns
Initial & Current Portfolio
Individual Stock Performances

But not all stocks have performed equally well. If we were to look closely at next graph, we will find that larger banks have performed much better than smaller ones. Four of the five large banks have given returns higher than market returns of 35.8%, whereas only one among the smaller ones has beaten market in last one year.

Portfolio Stocks Vs Index Returns
Quarterly Portfolio Performance

On a quarterly basis, the portfolio has been quite volatile. Though it wins the annual race comfortably, it should be noted that in 3 of the last 4 quarters, broader indices have beaten this portfolio!! It was only because of a jaw dropping 2nd quarter performance, that annual returns of the portfolio could beat the overall markets.

Quarterly Banking Portfolio Returns
This also shows that if someone was brave enough to go out and buy these banking stocks in February 2014, when they had come crashing down, the current returns would have been much higher the 45%.

It’s been rightly said that you need to show some Courage in Crisis (and take Cash-backed decisions) to make money in stock markets. But its tough to time the markets for average investors like. Period.

You can read more about the quarterly portfolio performance using links below:


Dividend Income from Portfolio

Apart from market beating capital appreciation, these stocks have also given dividends which are in line with expectations from PSU stocks. The ten stocks have cumulatively earned dividends of Rs 3173 on original investment of Rs 1 Lac. This gives a dividend yield of 3.17% to this portfolio – Decent by historical standards.

Banking Stocks Dividends
I know a lot of investors do not like stocks paying dividends as it means that company does not know what to do with its cash. But I personally prefer dividend paying companies. But this does not mean that I own all these shares in my personal or family portfolio. 🙂

So what should be the expectation for next 4 years? If one expects this portfolio to give similar returns (45%) for next four years too, then that would be wrong and over-optimistic. Under normal circumstances & assuming that common sense will prevail, maintaining a 45% rate for a portfolio of 10 stocks for five years is not possible – Assuming that we are not Warren Buffett. 🙂

But out there in markets, there are people who are ready to throw targets like 40,000 and 1,00,000 for Sensex over next few years at your face. They believe that we are getting ready for mother of all bull runs and its possible to earn 45% kind of return year after year.

My First Advice is to ignore them.

My Second Advice is to ignore my advice too. 🙂

Its your money and you have earned it the hard way. Don’t just depend on other people’s advice to take decisions about your money.

Buying On Dips – Adding to Core Portfolio

Some time back, we did a post on power of doing nothing in stocks markets. We still stand by our view that when investing for long term, Doing Nothing can actually work in favor of investors. 

But wouldn’t it be nice if you could give booster shots to your portfolio every couple of years? Wouldn’t it be great if you got an opportunity to buy shares of some great companies at reduced prices?


booster shots
Market Corrections can be used to give booster shots to your portfolio
 

We think it would be. 🙂

 
If you are an investor, you should understand that stock markets are volatile. You can either fear it and commit the most foolish but most common mistake of buying high and selling low OR use this volatility to your advantage.
 
Whenever stock markets correct (sharply or otherwise), its like markets are putting stocks up on a sale. For example, those who remember 2009 would agree that it was once in a life time sale of bluest of blue chips. It was like a distress sale where shares of good companies were being sold at throwaway prices. For example, shares of Tata Motors were available at around Rs 26 in March 2009. And within no time, i.e. by December 2009, the share prices moved up to Rs 160, and by end of 2010, it had skyrocketed to Rs 270!! 

tata motors multibagger
Tata Motors – From Rs 26 to Rs 270 in just 20 months!!!
 

If we were aware that markets available at PE multiples of 12 are grossly undervalued, we could have made a lot of money. 🙁 But past cannot be changed and future is still not here. So what should one do when markets correct? The first step would be to reassess your investment horizon. If you are among those who still prefer long term investing and are focused (like us) on safety of capital + dividend + atleast market matching returns, then it makes sense to buy stocks of companies that already exist in core of your portfolio (Check our ‘strangely named long term portfolio). This is assuming that you are sure that reason for which you bought these companies are still valid. And who wouldn’t like to buy cash-generating companies like ONGCs, Clariants & Balmer Lawries, etc at low prices?

 
stock portfolio
Portfolio structure & which type of stocks to buy on dips
 
When we buy stocks at reduced prices, we end up doing rupee cost averaging. We buy more for every rupee spent. This is a proactive way of strengthening the core of our portfolio. And once we are committed to our chosen investment philosophy, uncertainty and market corrections are waiting for being taken advantage of.

Disclosures: Long term positions in Clariant India, Balmer Lawrie, ONGC. No positions in Tata Motors

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How often should you check your stock portfolio?

This post is based on OSV’s post by Daniel Sparks. Daniel was kind enough to permit use of his idea for this post. Thanks Daniel 🙂


So how often do you check your stock portfolio? We have personally seen people checking stocks in their portfolio every few minutes! But we are not going to judge them. They may be short term traders who need to do it as they are there to make quick profits, or they may be ones who get a high everytime their stock moves up a bit (even though they will not trade regularly). We will rather talk about long term investors. Investors who are willing to stay put in markets for years and if possible, decades.

In the greatest investment book ever written (The Intelligent Investor), Benjamin Graham says –

“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored.”

Greats like Benjamin Graham, Warren Buffett & many other veteran long-term investors pay very little attention to daily prices. They buy stocks of great companies and pay more attention to what the company is doing and how the economy is affecting the company’s operations.

But we are not Warren Buffett, and therefore we need to understand that we cannot operate like him. We must accept the reality, that we do and will check our stocks as much as possible. 🙂

But what we all can TRY is that we can reduce are frequency of checking stocks. How do we do it? At first, we need to segregate them in following categories –
  • Large Caps
  • Dividend Stocks
  • Mid Caps
  • Growth Stocks

Large Caps

Large Caps are industry leaders, have sustainable businesses and provide solidity to your portfolio. They are generally among the top 100 companies by market cap. They typically don’t need to be checked very often because you can rely on their reliable cash flows & good managements. So if you are ready to stay invested for years, it does not make much sense to check them on a quarterly basis. Such companies don’t change much on quarter to quarter basis. An investor should rather focus on checking the annual reports (and letter from management). In addition to checking such stocks on annual basis, one should also set some kind of alerts to get notified in case prices move more than 5% in a day on either side (sites like moneycontrol.com allow such service). This helps staying in loop in case of some major news or development, which demands an investor’s attention.

Dividend Stocks
Being part of mature industries, dividend stocks are generally not very volatile. They are present in portfolio primarily for their dividends and less for capital appreciation. Like large caps, these stocks provide a lot of solidity to portfolio. Such companies should be looked at on a half yearly basis to see if they are performing in expected manner, whether dividends being paid are increasing / decreasing / remain same. Alerts can be set up in manner as specified for large caps.

Mid Caps
Mid caps are companies which are outside the top 100 companies by market cap and are more volatile to news or result declarations. Their prices move very quickly and therefore it is important not to be overwhelmed by any drastic price movements. The important point is to understand the difference between meaningful news and short term jitters and not fall victim to acting on emotions. Such companies should be checked on quarterly basis to see if the company is performing as expected or otherwise. Alerts can be set at (+/-) 7%.

Growth Stocks
These are companies that are growing at fast pace and are part of rising industries. Such stocks do not offer dividends (generally) and hence are of very volatile nature. Such stocks should be checked every quarter to see whether growth story is intact or not. Alerts can be set at more liberal (+/-) 7%.

One of the advantages of setting alerts is that it allows a long term investor to be ready to buy more, in case prices fall a lot but reason for buying the stock initially still remains valid.


We must understand that the most important decision is not how often one checks stock prices, but what one does with that information. One should act on changes in the economy or other conditions that affect the company.  Reacting purely on price changes is not a wise thing to do. Daniel Kehneman said:

“Investors should reduce the frequency with which they check how well their investments are doing. Closely following daily fluctuations is a losing proposition, because the pain of the frequent small losses exceeds the pleasure of the equally frequent small gains. Once a quarter is enough, and may be more than enough for individual investors. In addition to improving the emotional quality of life, the deliberate avoidance of exposure to short-term outcomes improves the quality of both decisions and outcomes. The typical short-term reaction to bad news is increased loss aversion. Investors who get aggregated feedback receive such news much less often and are likely to be less risk averse and to end up richer. You are also less prone to useless churning of your portfolio if you don’t know how every stock in it is doing every day (or every week or even every month). A commitment not to change ones position for several periods improves financial performance.”

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Building a portfolio for lazy investors

Nature’s depiction of a Lazy Investor

Not everyone has time or energy to invest in stock markets. Some have the money to invest. But everyone wants to make money in stock markets 😉 It is like saying that one wants to go to heaven but doesn’t want to die. We have already shared our thoughts on how doing nothing can work in stock markets. This post continues on building on magic of laziness.

 
Who should be interested in creating a Lazy & Boring Portfolio?
 
Anyone who has neither time nor energy to invest in stock markets but would like to atleast match the returns offered by overall markets. Though you can afford to not have time and energy, when investing in stock markets, you cannot afford to not have money. 🙂 But beware…you should take care of 3 very important things before you even think of investing in stock markets.
 
How to create a Lazy & Boring Portfolio?
 
We suggest following action plan for creating this portfolio –
  1. Start investing regularly and equally in 2-3 Index Funds. We recommend you read about importance of Index Funds to fully understand their benefits. After that, you can look at a list of Index Funds in India to choose the funds you want to invest in.
  2. India is a growing economy and is expected to maintain high growth rates for atleast a decade or two. So it’s not advisable to stay away from actively managed mutual funds. Alongwith index funds, one should also invest in about 3 Equity Funds – Large Cap, Mid Cap & Multi Cap Funds. This would provide adequate exposure to growth stories at various market capitalization levels.
  3. We assume here that one would also be interested in picking direct stocks. For boring and lazy investors, we suggest they stick with stocks of good companies. But good companies are not good investments at all prices. Hence one should wait to buy direct equities when markets are undervalued. Overall market undervaluation can be judged by checking ratios like P/E, P/B Ratios and Dividend Yields of the market. Our take is that markets trading at anything below P/E of 15-16 can be considered to be a good time to enter individual stocks (assuming that stocks themselves are not overvalued compare to their industry peers or due to some news or irrational exuberance). Having addressed the issue of when to buy, we now face the question of what to buy. A good starting point can be stocks making the index (like Nifty 50 or Sensex). These are large cap stocks that can be considered to be good long term picks. Another good but boring idea can be to look at stocks that pay good dividends and have good dividend payout history. These stocks offer constant stream of increasing cash as dividend payouts.
  4. Till now we have only looked at direct and indirect equities. It would be wise to have debt (funds) to bring in stability to the portfolio. Though Stable Investor has not done any research in domain of debt funds, a good starting point can be list of good long term debt funds available at moneycontrol.com
  5. Last but not the least, it is advisable to put some money in Bank fixed deposits too. You never know when you might get an opportunity to invest substantially in markets (Think: Crashes). During such times, FDs can be liquidated to enter markets and get stocks at bargain prices.
So what would be an adequate mix of all 5 above mentioned investment vehicles?
 
The right mix would depend on an individual investor’s risk appetite, laziness 😉 & investment time horizon. We suggest a below mix for an average investor…
 
 
A risk-averse investor may want to reduce exposure to index and equity funds from 60% to a lower figure of 20-30%. An enterprising investor with a long investment horizon may want to increase his exposure to equities and reduce that of Bond Funds & FDs from 30% to 10%.
 
Lazy investors (& not people) should understand that though they may not have a glamorous transaction record, maintaining their portfolio in line with their own personality will help in diversification, lowering of risk, leveling out of bull/bear cycles and generate market equaling returns, without having to stress yourself and missing out on more important things in life like family, friends and others 🙂