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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.
 

Is it a good time to buy / accumulate shares of SAIL – Part 1

In one of our previous posts, we mentioned that we avoid highly cyclical stocks. The reason being that we are not good at evaluating cyclical businesses and because these businesses have unpredictable earnings and cashflows. Instead we prefer sticking with known great businesses & simple companies.

But, just a few days back, a highly cyclical business caught our attention. The business was Steel. And the company was Steel Authority of India Ltd. (SAIL).
steel authority of india logo sail
Steel Authority of India Ltd.
We found SAIL available at Rs 68 apiece (March 15, 2013). This seemed a little too cheap at first. We then checked the historical price movements and found that it was indeed available close to its multi year lows [see graph below].

sail - stock prices over the years
SAIL – Trading close to its Multi-Year Lows
Now, a price close to multi-year lows can mean few things: Entire economy is in midst of a once-in-a-generation-recession OR Company has everything going against it OR Company is nearing bankruptcy (or similar financial outcomes). But as far as we could make out, neither is India facing a really big crisis, nor is SAIL nearing bankruptcy.

And the graph below clearly shows that though slow, the sales are increasing. Also, the operating and net profits are falling in last few years. That is a red flag. But considering that entire economy is struggling to gain momentum, a cyclical business like steel is bound to pay the price with declining profits.

sail - Net sales profits trends
Increasing Sales & Decreasing Profits
Once we had it confirmed that SAIL is not about to close down, we decided to check simple parameters like Book Value, Price to Book Value Ratio & Dividend Yields. And what we saw only confirmed our initial thoughts. The stock is trading not only close to its multi-year lows, it is also trading at valuations (P/BV) which have almost never been seen before for this company!!

SAIL - Price to book value
SAIL is available at its lowest P/BV ever!!
We also found that in past, book value per share had almost always acted as a very strong support for the stock price. But same has changed recently. The stock has consistently traded below its book value for last 18-20 months. It may be due to negative sentiments attached to commodities and economy in general, but we are not sure.

SAIL - book value per share trends
Consistently increasing Book Value (2002 – 2013)
We analyzed the stock on another parameter which we love a lot dividends. And once again, we were not surprised. Being a PSU, it has been quite generous with its dividend payouts. As of now it is available at mouth watering 4.2% Dividend Yield. Historically, it has had an average dividend (%) of 28%, which seems sustainable in the long term.

SAIL Dividend History
SAIL is a consistent dividend payer : Presently available with a yield of 4% +
So we come back to our original question?

Is it a good time to buy / accumulate shares of SAIL?

We feel that though a lot of indicators point that it may be a good time to start accumulating this stock, a little further analysis might be needed before deciding to start accumulating this stock. 

We take up the second and last part of our analysis in our next post.

Disclaimer – Created positions recently in SAIL.

Disclaimer – Author had a short stint in steel industry.

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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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