Three (and not Two) sectors which I don't understand well, but still want to invest in

UPDATE on 27th May 2013

In addition to sectors below, Auto sector is another one where I want to invest but don't understand very well. I only understand that India still has a large scope for improved automobiles, and will grow further, but yes, there're concerns of mileage sensitivity and high interest rates impacting new vehicle sales. Yes, I believe a good fund manager can choose the right automotive stocks and benefit from this long term growth prospect.
-------------------------------------------------------------------------------------------------

This is an old debate in my mind; you believe in long term prospects of a sector / industry, but since you don't understand the business well enough (specifics which go behind the scenes), you're not comfortable analyzing individual businesses in these sectors. In my case, these are:

1. Banking & Financial Services
2. Oil and Natural Gas
3. Energy & Power (conventional and alternate sources)

For each of these, I've a 'macro' viewpoint why these sectors will perform well in the long run, here're they:

1. Oil and Natural Gas is mainly burdened due to under-recoveries arising out of subsidies, and as I wrote last year, there're very strong reasons to gradually reduce fuel subsidy and make these products 'free tradable'. There're already strong signs of that happening, and as things improve, it'll very positively impact businesses in this industry.

2. As inflation lowers, interest rates reduce and infrastructure spending resumes, the first sectors to benefit would be power and energy - India cannot grow without improving the infrastructure to deliver good quality power to the industries, and there's a huge scope of improvement in these sectors. A lot of capital goods investment will be needed to make the power generation & transmission more efficient (and hence my strong belief in BHEL and Crompton Greaves), and this will benefit all the businesses that're involved in power generation, transmission or distribution. In addition to conventional sources of energy, a lot of focus is needed to improve the competitiveness of alternate sources of energy, failing which, India cannot bridge the "power deficit".

3. If the above two hold true, and infra spending comes back to good levels, a lot of problems related to NPAs and asset quality for PSU banks will be reduced, as these businesses will have cash flow to pay back interest and principal to banks. More new loans will be taken and this will further improve "topline" of banks.

Now, the problem part - why is it difficult to analyze these businesses?

a. Banks, especially PSU banks have a high influence from government, and this "ensures" that the asset quality of banks can deteriorate without any prior notice, banks may need to make "bad capital allocation" decisions under this influence. A large part of this also holds true for PSU companies in Oil, Natural Gas and Energy sector, and this brings the "factor of high uncertainty" and skews the risk-reward ratio to an unfavorable degree for individual investments.

b. Private players (most of them) in the sector have "bad reputation" of being un-ethical managers, or they're known to be involved closely with Indian politics and this again brings another high uncertainly factor.

c. There's a huge polarization within banking sector - private sector banks are quite expensive while PSU banks are cheap, and it's difficult to chose which ones to pick for individual investment.

Overall, there're compelling reasons to invest in these sectors, but the risk of individual stock picking is high and potential rewards don't justify taking so much risk. Additionally, most of these shares have "high market" price and hence a "basket investing' in selected stocks is also not easy for a small investor like me.

Why not choose passive index funds? Well, I'm not aware of any index funds for Oil and Gas sector or Energy sector, and the banking index funds have expense ratio nearly same as mutual funds mentioned below (HDFC Top 200 Direct Plan has an expense ratio of less than 1.75%, only marginally more than the cheapest banking ETF, and it's not too expensive for an actively managed fund which can 'avoid' investing in questionable stocks, which may still be part of passive index funds)

Hence, I'm planning to invest in a mutual fund that holds significantly in these sectors. I started analyzing the large cap (most of the good businesses in these sectors are too large to be small / mid cap stocks) funds I like, and incidentally, HDFC Top 200 holds more than 57% of it's holdings in these 4 sectors (capital goods included), as can be seen from blow table:

I understand that many of these stocks have become expensive, but since I have a decent belief in this theory, as well as asset allocation capabilities of fund managers of these funds, I'll go ahead with a prudent, incremental investment in these funds. I already have small investment in HDFC Top 200 Fund, and I now plan to increase investment in these two funds. I'll start SIP in Franklin Bluechip fund, and will make incremental top-ups to HDFC Top 200 Fund (easy as I can do a switch from HDFC Cash management fund just with an online click)

I welcome criticism on this plan - and will wait for the "idea soak in period" before acting :-), especially to let the 'dis-appointing feeling of missing the train (I got this thought first when NIFTY was at 5000 in Jan 2012, and I'm revisiting this when NIFTY is flirting with it's all time high levels)

Revisiting MOIL

I recently completed updating my investment checklist as well as asset allocation. Now it is time to start revisiting my existing investments and the stocks in watchlist, and see if there's any change needed. First one on the list is MOIL, since I've started to doubt my belief in the 'understanding of the business", which is like failing on the very first checkpoint in the checklist. So, here're my new thoughts on MOIL.

Here're the first two checkpoint:


Checkpoint 1: Is the business OUTSIDE your circle of competence [Charlie Munger]? Can you talk about it right after you're waked up from sleep? Do you understand the business well? Is it simple enough for an idiot to run [Peter Lynch]? Assume you're no better than an idiot!

Checkpoint 2: What is your main reason to look at this company? Write this down and once we analyze the business, we'll come back to see if our analysis is biased by this presumption [Anchoring bias, Charlie Munger]. If your reason is mainly a recent, sharp decline in share prices, try to find why so many people are selling, and if they know more than what you (prospective buyer) knows, or in other words, are you taking undue risk by investing into something with many unknowns?

My main reason to have invested in MOIL dates back to Nov 2010. This was around the time when MOIL IPO came on the street, and I had invested considering the comments from Mr. Udayan Mukharjee. I then watched CNBC regularly, and Udayan pointed out that MOIL was an industry leader, lot of cash on books, no debt, decent business and was trading at less than 10 P/E multiple, and hence it was a good buy. All good. Come Dec 2012 and we find the same company trading at less than 5 P/E if cash is discounted, and I started buying and took the stake to nearly 10% of my portfolio.

However, now, after soaking in lots of concept and having "experienced" value investing for more than an year, I realize one big mistake in having bought MOIL shares - I prooably don't understand the business very well, even if it is somehow a simple business that even an idiot can run. The major items that I don't understand well are:

- Manganese is used as a raw material in production of steel, and since MOIL extracts a large portion of their total ores for steel production, MOIL's performance is strongly dependent on how the demand of steel and hence manufacturing of steel fares. There're 4 layers involved here - demand and sale of steel, steel inventory levels, manganese demand and finally, the manganese inventory levels.
- This means, that for manganese prices to improve, steel production should increase to such levels that manganese inventory levels go down and production of manganese has to start again in larger quantities. This is a long chain of dependency, and the time to realize the benefits will be longer.
- I do not understand how steel demand will rise - yes, as infrastructure development  improves, steel demand will improve, but considering this 4-layer structure through which benefit of infrastructure spending will pass on to MOIL, the time to realize these gains will be elongated.
- I already hold a sizable amount of my investments in form of capital goods companies like BHEL and CROMPGREAV (where I've better conviction than about increase in MOIL margins), and hence, continuing to hold MOIL will further skew and increase downside risk due to uncertainties in improvement in infrastructure spending.

In short, I do not have conviction on how MOIL's profit margins will revert back, and how long they'll take.

What is the opportunity cost of holding and NOT holding MOIL's stock? This is an important question when making a buy / sell investment decision. Let us try to find out:

If I sell off MOIL, and the business conditions improve, it is possible that the stock can rebound to it's previous highs around Rs 450 when business conditions return back, and that's a gain of 100% over my existing purchase cost. However, as I described above, I've little conviction that this will happen anytime soon.

On the other hand, if I keep holding MOIL stock, I may lose upon opportunities like MCX India, IL&FS Investment Managers and other businesses I'm considering. For sure, I've conviction that I can generate better returns than MOIL in either these alternate stocks (if the analysis proves to be positive), or re-allocate the money into a good mutual fund and generate better returns.

Hence, I decide to sell off all my holdings in MOIL. However, I'll sell MOIL as I buy another investment, and hence, I'll start selling only after I've identified another investment opportunity.

Goodbye MOIL :-)

Asset Allocation

While I'm working on the revised checklist, I also thought that I should get my portfolio asset allocation right. In this short post, I try to pen down what would be my asset allocation strategy.

Since my human capital is "bond type', as I strongly believe that my job is reasonably secure, I must keep a large portion of my investments into stocks / equities. Hence, I plan to keep the following allocation

NOTE: I do not consider real estate as an investment right now, and hence I'll NOT count it in this allocation. Also, cash investments like providend funds are also kept aside from this asset allocation.

1) Set aside sufficient money for daily expenses, committed annual expenses and emergencies, maintained in savings bank account, apart from some money (encashable in 2-3 days) in liquid fund. This part of money is NOT for investment.

2) Remaining available funds are for long term investing and limited speculation. This is partitioned as

- At least 10% in fixed maturity bonds and balanced fund. I do not choose bank fixed deposits as I believe that the post tax return on these are disadvantageous and do not compensate positively for inflation. I plan to keep this part of investment in HDFC Prudence Fund, as it is a good balanced mutual fund and has performed well during deep market corrections.

- Up to 15% in commodity investments like GOLD and others.

- At least 60% in equity investments, most of which would be direct stock investments, while a small portion (mostly through SIP route) into healthy equity mutual funds. As I wrote earlier, these investments will be directed into the following mutual funds. Note that mutual fund investments will be increased only when there're little chances to directly invest into stocks.

Large Cap focussed

- Franklin India Bluechip Fund
- HDFC Top 200 Fund

Small / Mid cap focused

- DSP Blackrock Small & Mid-cap fund

- SBI emerging businesses fund

- Franklin India Prima Fund

Amongst the direct equity investments, the following allocation looks reasonable on the diversification and balancing front:

- At least 10% in High Divident Yielding (3-5% or higher dividend yield) stocks. These stocks will provide cushion to the equity portfolio. Some of the potential stocks in this category of watchlist are: 

• IL&FS Investment Managers (~7% dividend yield at CMP)

- Up to 30% in large, stable businesses (stalwarts) from which I expect to generate 30-50% return in not more than 2-3 years. I believe that these businesses are decent but would not be suited for a very long term investments, and when they fall due to some transient problems, they can be picked up for decent returns. Some of these in my portfolio / watchlist are

• Infosys
• Possibly BHEL & Crompton Greaves, but these two would also fit into the next category

- Up to 5% in speculative bets / sin stocks. These will help fulfill the human desire to speculate, and also occasionally make some money. But again, here too, the main driving principle will be to protect the capital. Here, I'll take help from my brother who studies and practices technical analysis, or bet on some stocks where I feel risk / reward ratio is highly favourable.

- Remaining investments into Turnaround and long term stories. By turnaround, I mean businesses which are sufferring some structural problems right now (like an evolving industry or the business is transforming), but the long term prospects look good and I have the conviction to hold them for a long period of time, expecting to generate multi-bagger returns. Some of the investments in this category are:

• Piramal Enterprises
• Bharti Airtel
• CARE ratings
• MCX India
• Amara Raja Batteries
• Possibly BHEL & Crompton Greaves, but there's confusion as they also fit the above category, and my conviction is NOT very strong enough to hold them for more than 5 years (as I believe that very long term return may be below average returns)
• Mazda, but since this is a small cap, I need to build that conviction again through a deeper analysis.

I'll now work towards reviewing my existing holding and re-allocating based on benefiting from opportunities and maintaining a reasonable asset allocation.


UPDATE as on 25th May 2013
Here're the charts showing my current asset allocation

As can be seen from charts above, my current portfolio is heavily inclined towards "retirement investments", and I need to balance the same. Here's what I need to do:

1. Need to infuse new capital, as I can't reduce Provident Fund and re-allocate it into other investments
2. Need to increase investments in the following asset classes
- Stalwarts (medium term horizon)
- All forms of mutual funds, including a dividend plan which would generate regular income
- Withdrawable bonds, like Fixed Deposits. This is to ensure we always have liquid funds for emergency needs, and which can be withdrawn within couple of days. It may so be the case that I'll maintain a minimum investment in liquid debt fund and not go for a separate investment, but considering the size of my current portfolio, I need to infuse new capital for any new investments, and the current size of HDFC Cash Management Fund only covers for "withdrawable bonds' category.

Checklist

After a lot of business at work, I'm now back with trying to set a regular routine, and before I go ahead an start analyzing the stocks I listed in my last post, I must write down the checklist - my checklist based on my latest learning. I did make a "huge" checklist last year, but over time, I've realized:

- The bigger the checklist, the bigger the resistance to adhere to it
- It is very important to bring together ideas (mental models) from different people and perspectives into the checklist to make us think in different dimensions. While this doesn't eliminate the risk of "black swans (unknowns) [Nasim Taleb]", it does help to reduce it.

- We tend to flow away into details when we solve a problem, and we 'forget' the big picture and the original problem we were solving - the same happened with my old checklist, it grew too big and I forgot the first reason why I needed a checklist!

The first reason we need checklist is to make sure we don't forget - and we don't go where we can die. Instead, I kept making a checklist which had so many items, without the focus on the main objective. Hence, I derive the following new checklist, with the main objective in mind - "don't go where you may die"...and yes, I'm getting more and more influenced by what Mr. Munger has said, and I'm reading and planning to read more of what the legendary investor has written, especially on behavioral finance.

So, we start, and once again, keep the following in front of mind:

- Don't go where you may die

- Invert, always invert, for there can be infinite ways to prove something, but only one exception is needed to disprove, hence the "process of elimination" or Inverting the problem is a more efficient way, and no wonder why science has used it for such a long time, successfully

Most importantly, the checkpoints are eliminating - if you can't provide a very convincing answer to move to next checkpoint, you should probably let go the stock and look for others :)

And before we start eliminating based on checklist, let us write down the following two point - our "initial perspective" about the business / stock:

• What is your main reason to look at this company? Write this down and once we analyze the business, we'll come back to see if our analysis is biased by this presumption [Anchoring bias, Charlie Munger]. If your reason is mainly a recent, sharp decline in share prices, try to find why so many people are selling, and if they know more than what you (prospective buyer) knows, or in other words, are you taking undue risk by investing into something with many unknowns?

• What kind of investment do you consider this business initially? Are you considering it as a long term story, or a medium term play (sorry, short term plays, i.e. for duration less than 3 months, are OUTSIDE the circle of value investors). Write down your initial thought in terms of [Peter Lynch] investment types - High Dividend Yielding, Stalwarts, Cyclical, Fast Grower, Turnaround story or an Asset Play?

TBD: Where do we add checks about finding scuttlebutt [Philip Fisher], behavioral biases, checks about black swans (really possible?). Pre-mortem?

Checkpoint 1: Is the business OUTSIDE your circle of competence [Charlie Munger]? Can you talk about it right after you're waked up from sleep? Do you understand the business well? Is it simple enough for an idiot to run [Peter Lynch]? Assume you're no better than an idiot!

Next, we try to eliminate the business based on management quality, for, a good manager may not be able to turn a bad business into a good one, but a bad manager can certainly damage a great business, irreversibly, and hence we must be very careful of the management.

Checkpoint 2: A good management is essential to keep a "good business" good, and hence, we must identify whether
a) Is management candid with shareholders? Have they done what they said in the past?
b) Does management act rationally?
c) Do management acts imply integrity?
d) Does management demonstrate good capital allocation skills, or they're stuck in institutional imperative? Examples being prudent dividend declarations when no avenues for cash, buying back shares to reduce stock dilution etc.
e) Does senior executive compensation include company stock options, and is it designed to bring sense of loyalty and belief? Are "insiders buying" the stocks when their market price goes down? Is promoter holding a clean holding or shares are pledged to "manage cash"?

Checkpoint 3: Does business possess a strong economic moat [Warren Buffet]? Check the following:
a) Do customers have a bargaining power that keeps an upper bound on prices and margin improvement is limited (cost cannot be lower than 0%)
b) Do suppliers have a bargaining power that keeps a lower bound on costs, such that margins are squeezed?
c) Risk of new entrants, who may play pricing wars and put pressure on pricing, i.e., does business have "earning power" like a brand value that allows it to maintain (or even increase) prices?
d) Is there an alternate product that poses a risk as a substitute to the product / service that business produces? Could it result in a permanent loss of revenue to the business?
e) Is the economic moat sustainable, or just due to luck?

Checkpoint 4: Since every business is essentially a system which takes in Cash and "is supposed to" generate more cash, such that the Return on Invested Capital (ROIC) is higher than Weighed Average Cost of Capital (WACC). Draw a "cash flow diagram" for the business explaining how it generates cash, and find out whether it has consistently been able to generate higher ROIC than WACC. Consider at least a period of last 5 years.


Checkpoint 5: Before we go further, we need to make sure that the financial health of the business is good. Answer these sub-points to find this out:

a) Is company sacrificing operating margins to grow revenue (lack of sustainable moat)? We want a business which is able to grow profits at least as fast as sales (maintain / grow operating profit margin).
b) Is operating cash flow poorer than profit (EBIT / EBITDA) on several occasions (consistently positive operating cash flow)?
c) How has working capital requirement changed over years? Is business generating cash faster than it needs (negative working capital)?
d) Is business generating good returns on capex, or it is burning precious cash in attempting to grow by capital spending (incremental return on capex)?
e) Is the debt on balance sheet concerning? Is most of operating cash leaking away in interest payments? Is business able to retire debt and gradually reduce interest burden? How long do you think will it take for the business to bring down debt to advantageous levels? Is dividend being regularly paid despite debt on the books? If so, is "Financial Leverage Index" > 1, indicating that return on investments is greater than cost of debt, and hence the leverage created due to debt is advantageous to the business, and it is good to pay dividends using generated cash, while keeping the debt at advantageous level.


Checkpoint 6: Stocks generally become value picks when they possess a healthy business with an able management, but suffering from a transient problem which drives the stock prices southwards. Is the business suffering from any such condition, and if so, why do you think this is not a permanent change (inflection point)? If you believe it is indeed an inflection point for the business, why do you think business is capable of turning it into an advantage [Andrew Grove]?

Checkpoint 7: Are there any negative catalysts foreseeable, that may impact the business prospects going forward, like a long term industry slowdown, increasing competition, or a regulatory change? On the other hand, what are the positive catalysts that'll bridge the gap between price and value?

At this point, you'd have either closed down, or successfully written down your understanding about the points above, and find that the business is healthy enough to pursue the analysis further. Before going further and performing a more detailed analysis, let us write down the expectation

Refer to a different post on guidelines for TBD stock valuation.

Risk Log: This is a concept used in large engineering projects. It is a way to write down risks involved in the project, and how to mitigate each of them. Borrowing this concept to investing, it'd make sense to create a risk log after having analyzed the points above, so that we know how much risk is involved in this investment, and are we going to get compensated enough for taking this risk [Charlie Munger]?

Stock Valuation: Do you expect the transient problem to go away / last for a small time, say a few months, and the temporary depression in stock can be used to make a small investment and benefit from it, i.e., do you consider this a stalwart [Peter Lynch]? If so, perform a "relative valuation" and find the "right buying price". If you've chosen this stock as any other form of valuation play (live a high dividend yielding stock), other than a long term holding, write down here and explain what is the right buying price, and why do you believe that you have adequate Margin of safety to justify this medium term investment's risk is well calculated.

However, if you still hold your "initial view" and plan to hold the stock for long term, perform a more detailed absolute and relative valuation and take sufficient margin of safety to address the concerns pointed out above in business analysis.

Opportunity Cost: Before taking the final decision, make sure that you're not overlooking the opportunity cost in this investment - can you allocate money elsewhere and get better returns with better margin of safety?

Final Decision: Does "initial view" still hold true? Is our analysis above somehow biased by those presumptions? After your analysis indicates that you should buy this stock, perform the following:
a) Keep the stock under "watch" for a week, and DO NOT buy or sell.
b) Post on blog and seek critical feedback. Seek contrary opinions, dis-confirming evidences, and try to find what you do not know [Charlie Munger].
c) At the end of the week, if your conviction in the business and stock's prospects is intact or stronger, go and BUY :-)

Analysis List

Over last few days, thoughts have changed, and I've come back to "analysis mode". Few discussions lead to the conclusion that just reading doesn't work - it works, but doesn't help you tame your emotions and biases.

Hence, now that I'm beginning to resume a regular "study plan", I plan to add a regular analysis work assignments as well to make it more lively and practical. Hence, here's my shortlisted stocks that I want to analyze in next few weeks. This list also includes stocks I already own - with the intent to re-allocate funds by selling off "weakest' holdings and buying better ones - only after a detailed analysis and "patience test of 2 weeks". So, here's the list, in order of my interest:

1. Amara Raja Batteries: I wrote about it earlier on the blog, and have always found it interesting, but need to justify whether it is really expensive or not. This is where I'll learn about Charlie Munger's principles and try to apply to AMARARAJA...

2. MCX: Again, similar to AMARARAJA, I like the story, it is beaten down recently and available around all time low, and below IPO price, but need to do a thorough analysis if the price is good enough to justify buying...

3. CROMPGREAV and BHEL: Top holdings in my portfolio, and still beaten down and around multi-year lows. Need to analyze if it makes sense to add more capital into these names.

4. MOIL: I like the story, and it has not moves anywhere - keeps oscillating...I stand at minor losses, but need to perform a reality check - while Manganese ore prices will increase, can I really bank upon it and hold on to MOIL? Do I understand this company and industry good enough - or should I move funds across, to say SAIL to benefit directly when steel prices rise, or just exit commodity stocks altogether...

5. BHARTIARTL: Again, like the "long term" story, but could it be too early to enter? Can it fall in price further due to mid term concerns? Need a reality check again...whether to exit or keep accumulating for long term...

6. Piramal Enterprises: They've decided to sell stake in Vodafone - on track with what they said when they bought it - but what do they do with the cash? Are they eyeing some big acquisition? Probably something like Novartis India stake? Need to think...hold or book profits?

7. Infosys & CARERATINGS: Just perform regular review. Any better opportunity? Just try to find if it is one of the worst of my holdings today? Most likely not, but need an unbiased analysis...

8. MAZDA: Could it generate acceptable returns in long term, or makes sense to re-invest? Think...

9. Bajaj Auto & Tata Motors & TVS Motors: Auto companies? Think about them - are they available at deep discounts?

10. IL&FS Investments: Probably too complicated to understand, but can I learn from Charlie to deviate a bit from circle of competence and still make some great investment decisions? Similar to what holds true for MOIL...but need careful thoughts...

11. Goodricke Group, Kirloskar Pneumatic, Swaraj Engines, KPIT Cummins, NIIT Technologies, Persistent Systems, Solar Industries India: These are filtered based on some "healthy business" parameters, but no "story" yet for them, to analyze and see if any of them is a great deal, compared to rest of the stocks for which I have some story...

Finally, to remind myself that this blog is currently also my investment journal, and I must write down my thoughts as well action plan before I do anything - will try to be more regular and post even my thoughts as micro-posts as I resume the daily studying routine...

Let the journey begin...

Slight change in "plan"

UPDATE as on 26th Mar 2013: I met Vishal Khandelwal, the chief Tribesman of Safal Niveshal on the evening of the day I originally wrote this post. Earlier in the day, he commented and cautioned about uncertainty in how PPFAS mutual fund would perform. We later had a great discussion about the current times and what should be the most favourable investment strategy, and here's further refinement to the plan below

Keep liquidity to benefit very good chances Mr. Market will give us in weeks and months to come. Even though the index is closer to the peak made recently than the bottom made in end of 2011, a large number of stocks of healthy businesses are at their several year lows again. This is interesting. While there's a risk that the stocks can fall further below, but now they're available at much favorable terms than before, and hence it makes sense to keep liquidity and "slowly and carefully catch the falling knife", small trickles at a time and keep accumulating good businesses.

I've a few funds that I don't want to continue, and they're nearly at break-even, and at the end of Financial year, it makes sense to lower the tax liabilities by selling off these investments. This will provide some liquidity, apart from the capital freed up in earlier planned mutual fund SIPs as I wrote below.

Also, regarding PPFAS mutual fund, I'll first try it by putting in a small amount rather than commit to SIPs right away in the NFO, and then see how they perform for next 2-3 years.

All this means that now I have about 70% of my planned monthly savings free for stock accumulation, not to mention the surplus cash inflow every month due to salary hike that'll come on its way very soon :-)

Vishal also suggested to keep the "cash in a liquid fund" so as to further reduce tax liability and still have enough liquidity to pay for stock purchases. HDFC Cash Management Fund is a very low cost (0.2% for direct investors) fund that can help generate decent post tax returns and give the desired liquidity. However, note that one must keep some pure cash liquidity in a savings account for day to day and emergency needs.

The next step now is to now re-analyze the stocks I hold in my portfolio and any new opportunities (here I differ from my earlier statement, but this means that I'm willing to churn the holdings to bring in better ones - where I have much higher conviction to hold and benefit in the long run). I've realized that simply reading doesn't work - it's probably not fun, and I somehow can't learn without hands-on. I know this is not funny, but as long as I can patiently invest, and not get impulsive and start "trading" and write before buying, this will work for me.

P.S: I completed sale of PNB and redirected 75% of the proceeds to buy CARERATINGS and remaining I put into BHEL and CROMPGREAV which were at better price now. Further on, any fresh capital infusion into the portfolio will follow a "write up" on why I'm doing it with clear justification.

Happy Investing and good luck to you and me for the accumulation period!
==================================================================

Soon after I wrote my plan couple of weeks back, I came across "Parag Parekh's entry into Mutual Funds", and I found about their plan to launch "PPFAS Long Term Value Fund". I'm excited to know that an able value investor is going to lead a value oriented mutual fund, probably for the first time in India. It's principles align well with what a value investor thinks.

Accordingly, I'm making slight change in the mutual fund investment plan. Instead of diversifying into 5 equity based mutual funds through SIP route, I now plan to route major funds into PPFAS mutual fund when it is launched, and I've started SIPs into HDFC Top 200 Fund and SBI Emerging businesses fund. I wanted to get some exposure to very good skills of Franklin Templeton mutual fund, but now I don't have a choice - or I have a much better choice :-)

Also, considering a renewed confidence in value investing based on the learning that "it takes only a few weeks for stocks to outperform even after a prolonged period of underperformance", I'll start analyzing my existing investments, starting with the one which has maximum portfolio exposure, and address re-allocation. This means, that I'll analyze business again in light of latest developments and financial reports, and revise the right purchase price range, and if stock falls to this range and I've surplus funds (after setting aside for SIPs), I'll make incremental investments in most favourable holdings (the ones available at greatest discount to my "right purchase price", not necessarily the one in which I'm making maximum loss (I'll not try to blindly average and bring cost down - I'll try to make right capital allocation)

I'll also need to take a decision soon about another large investment - into real estate, and how to manage continuing investing in equity. More on that after some time...

Swap PNB with CARE Ratings

Update as on 23rd March 2013

I've completed the swapping. I sold all of my holding in PNB at around Rs 793 (average), and bought CARERATING at around Rs 810 for 75% of the sale proceeds. I'll keep rest of funds and now analyze which would make the best sense to route this amount to - CARERATING or some other existing holding (potential candidates being MAZDA, CROMPGREAV, BHEL, BHARTIARTL and MOIL)

=================================================================

In my last post, I mentioned the following about these two stocks:

8. CARE Ratings: I subscribed and was allotted 20 shares in the IPO. Since I believe in long term prospects of the industry and the business, I decided to hold on and NOT book 25% profit which came on the listing day. I'm even willing to make more investments in this stock when I have surplus cash and that price is low (the stock has fallen closer to the IPO price in recent weeks), however, any fresh investment after careful incremental analysis only.'

9. Punjab National Bank: This is a pure valuation play - buy known banks when trading at significant discount to their book value to insure against "unknowns" in balance sheet. However, I've committed mistake of not selling this stock when the intermittent re-rating occurs. This stock confuses me - whether to keep it as a short term (3 - 6 months) investment and exploit mis-pricing, or hold it for long term considering PNB's status. I don't think the business is great, especially since it's a PSU bank with command from government which often deteriorates asset quality, and it'd probably be better to be conservative and sell it upon the next rally in stock (and when P/BV comes above 1)

Looking at current price movements, PNB is around book value and there's no clarity on how far can it go. We've seen strong resistance around 900 - 925 range from which it has fallen. Moreover, the very recent sting operation report on private sector banks can keep banking sector in general depressed if not falling, and we're not sure how long can it take PNB to reach back ~920 range from current level of 800.

On the other hand, despite good results and dividend payment, CARE has come closer to IPO offer price, probably on account of profit booking. Although I analyzed it to be reasonably priced at Rs. 750 during IPO, paying slightly higher for a healthy business is not a very bad idea, especially when we're re-allocating capital from a riskier bet to safer, long term story.

I'll start selling PNB and converting the proceeds into buying CARE stocks, maybe in 3 or 4 tranches, since there's a news event (RBI policy) around, and market seems to be at a short term inflection point.

After this action, my portfolio will have no short / medium term bets, and all the stocks are long term holdings.