Advertisements

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.
 

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 🙂