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9 Stocks – Dead Monk Portfolio

After procrastinating for months, I am finally sharing names of companies which are part of Dead Monk’s Portfolio (DMP).

But before that, here is a gentle reminder of what to expect from this portfolio.

In previous post discussing (or rather rethinking) Portfolio Structure & Composition, I mentioned that for DMP, I would stick with Core Satellite structure and a maximum of 15 stocks in the portfolio. You can read more about the reasoning here.
core satellite portfolio of stocks
Structure of Dead Monk’s Portfolio
In a follow-up post deliberating the need to find more dividend paying companies & stocks from other sectors, I mentioned that most of the stock in existing DMP pay decent dividends. But just to be on a safer side, I would also keep an eye for new dividend candidates, in case I decide to kick out some of the existing stocks. There is good bad news and bad news on this front. I have removed one dividend payer – Graphite India from the core. And next bad news is that I have not found a suitable replacement for this company. 🙁 Hopefully, I would find it soon enough.

Another point to note here is that no. of stocks in DMP has been reduced from 15 to 9. This is because of one above mentioned removal, as well few more removals from satellite part of the portfolio. I have also not named specific companies in Misc (Satellite) part of the portfolio. This part deals specifically with short term and speculative bets and is more dynamic (changing) than rest of the portfolio.

Out of the 9 stocks, 7 were part of original portfolio too. Two new entrants are marked with a ‘*’.

So here are the 9 stocks –

ONGC

Clariant Chemicals

Balmer Lawrie & Co.

Tata Investment Corporation

Axis Bank

ITC *

Yes Bank

IDFC *

Cairn India
9 stocks of portfolio dead monk
9 Stocks in Dead Monk’s Portfolio
I would have personally loved to add more stocks in this list to achieve higher diversification. For record, only 4 sectors namely Energy, Chemicals, Financials & FMCG are part of this portfolio. You can say that this kind of diversification may not be sufficient. But this portfolio is in line with my own risk appetite and understanding of certain sectors. I would prefer to stick with only a few companies and business which I understand rather than venturing out dangerously in areas I don’t understand. I may be missing out on potential multibaggers here. But that is a price which I am ready to pay to have a stable, ever growing portfolio of stocks which I am ready to hold for decades and not just years.

Note – You might say that this portfolio is not stable at all. It has been reworked in less than 2 years itself. Correct. It’s true that I have taken the liberty to change (reduce) the no. of stocks in the portfolio. But this is because I myself am learning newer things about myself and my personal investment psychology. I am arranging a long term portfolio around my personality rather than it being the other way round. Anyways, most of these 9 stocks were already a part of the original portfolio. So change is there, but it’s not an earth shattering one. 🙂

I have already covered about most of these companies in detail as provided in a list below.


One particular business which has seen some drastic changes in last few months is Clariant Chemicals. I am personally not very sure as to how to take a call on this one. But because of management’s proven track record and respectable dividend policy, I have decided to stick with the company for time being. But you can take a call yourself by reading my thoughts on Clariant Chemicals and also weighing the consequences of some recent developments (link).

As far as ITC is concerned, please be aware that this is a business which I like, but maybe not at current valuations. So one can wait for valuations to come down. Or if one is investing for years to come, a steady and disciplined buying of ITC’s share can be considered.

I would leave you with these thoughts and this ‘link-heavy’ post. Rest assured that I have put most of my money where my mouth is. 😉 Do share your views about these nine companies and also share your list of stocks which you would be buying for next few decades.

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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.

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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.
 

Stock Portfolio Performance – Update 1

This is an update on price performances of stocks suggested for Dead Monk’s Portfolio.
 
It’s been 3 months since we came up with a list of 15 stocks to hold for long term.  Though 3 months is nothing when talking of long term, we anyways decided to see how individual stocks are doing and if any one demands any special attention.
 
Note- Cyclicals & Misc. are not a part of the Core Portfolio. They are not to be held for long term.
So after 3 months, are we still interested in stocks we suggested initially? Yes we are. But we would also confess that a few other stocks in our watchlist, are keeping us interested.  🙂 As of now, we don’t know if we would use them to replace a few stocks in Dead Monk’s Portfolio. At present, we prefer to keep our portfolio as it is.
Please note that we are just checking price performance (& not stock fundamentals) in this update.
 
And before you decide or even think of buying any of these stocks, we request you do your own analysis.

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. 
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Launching the Dead Monk’s Portfolio – Ground Rules

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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Thoughts on starting a new portfolio – Part 3 : Does entry price matter to a dividend investor?

Stocks mentioned in post – INFY
We have been thinking a lot about developing a framework for our long term portfolio. As of now, we are quite sure that this portfolio would be based on Core-Satellite approach. For Core portion, we are almost sure that we want to use dividend investing (what?) as our primary approach. But why have we chosen dividend investing as our main approach? We found an article which words everything we had in our mind to answer this question. If you have time and are interested in dividend investing, please do read the article.
 
Though we have chosen our primary approach, we must confess that we are not 100% sure. We are confused. We have dilemmas which we hinted at in our last two posts (1 & 2) too.
 
Dilemmas
  • Does entry price matter to a dividend investor?
  • Does it make any sense to bother too much about capital appreciation of stocks chosen for their ability to give out dividends year after year?
Though we will try to resolve these dilemmas in this post, we would like you to read a financially touching article on Seeking Alpha (link). The article describes a man’s dividend investing journey and how he ensures that his income increased year after year, without any dependence on his employer. A brilliant story!
 
Note – We shall be using the term High Entry Price in text below. By high entry price, we mean that company is trading at multiples which are more than their historical averages.
 
Suppose an investor purchases share of company which is trading at high multiples. This company is a regular dividend payer. This investor would now be stuck with a low yielding security for a long period of time. On the other hand, a company trading at lower valuations, cannot go down much lower as it may already be at levels which are close to what it would cost an acquirer to pay for it. Luckily, an investor would now be stuck with a high yielding security for a long period of time. Now who would mind that?  J
Problem with high multiple stocks
The problem with high multiple stocks is that future growth is already accounted for in stock prices. This implies that long term investor could likely see little gains even if the earnings grow over time. And one quarter of missing earnings estimate, will damage stock price for a long while as these high multiple stocks are volatile (Example – Infosys) . Also, once the earnings slow down, the PE also contracts (stock is de-rated) and price either goes down or stays flat if earnings have increased sufficiently to compensate for lower multiple.
 
Problem with investors like us
Investors like us chase overvalued dividend stocks because they are afraid to miss the boat on future price gains and dividend increases. Unfortunately, stocks with higher valuations have a higher chance that anything that goes wrong could have a negative effect on share price & dividend income stream. On the other hand, investors who purchase stocks at reasonable valuations, have better chances of realizing rising price and dividend returns.
 
Did we answer the main question?
All the above discussions point to the fact that it is important to have some sort of valuation guidelines, before we purchase a dividend stock. This will help in avoiding stock purchase decisions made out of ‘love for stocks’and regardless of price. After all, purchasing a stock at inflated price levels might lead to sub-par returns for several years.
 
Would like to know your views and counter arguments.

Thoughts on starting a new portfolio – Part 2

Without wasting any time, we start from where we left in our last post.

  • We mentioned that we might take core-satellite approach for Dead Monk’s Portfolio (Why this name?). After giving it a second thought, we think that instead of going for 1 Core + 1 Satellite approach, we can take 1 core + 2 satellite approach.

Core

  • This part can account for 70% of portfolio size and have stocks which have a good and consistent record of paying generous dividends (if possible, increasing year on year).
  • Stocks in core part should be bought when markets are down (markets trading at low multiples of PE, PBV & Div Yield)
  • Stocks themselves should be trading below their average historical PEs, close to their 52/104/156W lows, below their book values.
  • This part may consist of stocks which are generally referred to as Boring stocks.
  • We are still pondering whether it (even) makes any sense to bother about capital appreciation of this part of portfolio?

Growth Satellite

  • This part can account for 20% of portfolio size and can be populated with companies which offer above average growth potential in long term. These may or may not be doling out generous dividends.

Special Situations + Miscellaneous Satellite

  • This part can account for a maximum of 10% (ideally 5%) of portfolio size and can have stocks which are in midst of certain extraordinary situations. Frankly speaking, this would form the speculative part of portfolio.

This is second in a series of our thoughts on developing a framework for long term portfolio (DMP). You can check Part-1 here.

May the Dead Monk give us wisdom 😉