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!
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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)

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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.

Latest Portfolio and plan ahead

UPDATE on 13th Mar 2013

One of my facebook friends read this and posted the following comment:

"You seem to have diversified too much! You hold 7 mutual funds, index fund, gold fund, bank deposits and 9 companies apart from 'sin' money?! Surely too much right?"

Here's my response to the question on too much diversification:

1. I have 5 equity mutual funds, 3 into small / mid caps and 2 into large cap. This is to reduce risk of "key man". Moreover, when I'm going into study phase, I'd prefer to invest primarily into mutual funds and almost no investments directly into equity.

2. Debt funds are primarily a place for parking incremental gains, and not fresh capital. I believe this is better than holding these gains as pure cash, and when I liquidate stocks, the macro environment may not be right to make fresh investments into equity or other main stream funds.

3. Investment in GOLD is for "traditional purposes"

4. Finally, NIFTYBEES is the last resort when I don't have clarity and conviction to invest money in any other vehicle, and I just want to ride along the index.
In any case, not all of these will be present in my portfolio at all times. As I gain more confidence from learning and the fact that I can invest directly in stocks, I'll reduce exposure to mutual funds. Regarding 9 stocks, I think 10 is more or less the maximum number of stocks an individual can follow diligently. Yes, 9 is close to this upper limit, but this 9 is mix of my decisions and their changes over last 1 year, and I'm OK to reduce this, but honour 10 as upper limit at all times.

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I'm back from a long break, and time now to catch up on value investing studies and practice. This one's a quick dump down of plan ahead.

Stay with no more fresh investments directly into stocks, unless justified with strong reasons. Any fresh investible cash to be added to mutual funds. Here's the list of mutual funds (equal contribution, which gives 60% into small / mid caps and 40% into large caps) I've selected:

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

Balanced / Debt focused

Depending on macro-economic outlook and its understanding (through interest rate cycle and equity market P/E cycle, apart from global financial situation), any surplus funds when there're no good options for main-stream equity investments, will be distributed in one of the following, depending on relative valuations:

- Bank Fixed Deposits

- Gold through GOLDBEES ETF

- Index fund through NIFTYBEES ETF (only if there're reasons NOT to add one time into mutual funds, such as when amount of cash is too small to invest equally in all mutual funds)

- HDFC Prudence Fund, as a balanced investment in equity and debt

- ICICI Pru Gilt Investment Fund Growth Option, as a debt oriented investment vehicle

Apart from these choices of investment vehicles for fresh capital, I've also categorized the direct stock investments that I hold currently into three classes:

Long Term Stock Investments

These are investments where I believe that the potential unlocking will take at least 3 to 5 years, such that I expect a return of at least 50% (3 years) to 100% (5 years), assuming a hurdle rate of 15%, and the following holds true

- I believe in the "story"

- The business quality is good and I expect business to grow in value over long term

- I've performed a thorough qualitative analysis to justify investing in this company, and I've performed a reasonable valuation analysis to NOT have bought the stock at expensive valuations.

Right now, the following are such stocks in my portfolio, although I may not have performed an in depth analysis for all of them.

Infrastructure & Natural Resources

I believe that India will grow and infrastructure still needs to play a big role. I've bought these stocks at reasonable if not cheap valuations, and when infrastructure spending rebounds, these businesses will see improvements in earnings and the depressed stock prices will see upwards re-rating. When this happens, I'll have a re-look to analyse if it makes sense to continue to hold these stocks or book profit and channelize elsewhere

1. Crompton Greaves

2. BHEL

3. MOIL

Telecom and IT

These are backbone of Indian economy, and the new generation services growth is linked to these industries. Moreover, the following two businesses have been the leaders, and they still hold potential to continue to remain so. Bharti with its hold on telecom spectrum and market position, and Infosys with a conservative management and a lot of free cash, will slowly grow and regain their "leader status" in the stock market when the next peak of bull market comes. That'll be the time to revisit them and see if to hold them further or not

4. Bharti Airtel

5. Infosys

Medicine / Healthcare

No doubts that healthcare industry will grow real big as Indian population gets older and has cash to afford quality health care when they retire. Since I've written about this company on my blog, so no further here :-)

6. Piramal Enterprise Ltd

Manufacturing (Small cap stock)

This is a small company which I believe has good potential to continue to grow and it has able management to not destroy the good balance sheet position like others. It's my sole "Lynch type" holding, but I'll remain conservative to evaluate it continuously and make fresh investments in this company only at reasonable valuations.

7. Mazda Ltd.

Financial Services

No doubts this industry plays a big role in Indian economy today, and has the largest weightage on indices as well. I've chosen the following two stocks, but with doubts about PNB, as mentioned below

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.'

P.S: I also hold a tracking position (1 share) in Hindustan Unilever (HUL). Its a great business, but probably still too expensive below 450. I need time to find the right valuation method and good purchase price and start accumulating this evergreen stock as it falls when money moves into cyclicals. Such stocks like FMCG / Pharma need to be picked up slowly like an SIP in Mutual Funds, since you never know when they again become market darlings, and finding a floor for them is very difficult. Another reason to buy this stock individually is since none of the mutual funds I selected above hold HUL, and I simply love the business (through scuttlebutts, of course :-))

Short Term Plays / Sin Money

These are investments where I see an opportunity with reasonable margin of safety to exploit market mis-pricing to my profit. Examples include, but not limited to:

- BFSI stocks: Buy when available at good discount to book value, and sell when revert to mean (P/BV > 1)

- Beaten down stocks: Carnage in market causing some stock to be beaten down sharply, and I have strong reasons to believe that the stock can rebound at least 15-20% in 3-6 months.

Since the risk is high, I'd want higher returns from such investments - at least 20-30% in the investment horizon, if I don't see reasons that this will happen, I'd rather stay away.

Moreover, I'll limit to 15-20% of my portfolio in such stocks to avoid major erosion of capital in case these "bets" go wrong. This doesn't mean I'll always invest in such stocks, and I'll be happy to park surplus funds in mutual funds if I can't find such opportunities.

Some examples where I recently benefited, although only 3% of my portfolio holding was in such stocks. All four below were beaten down for various reasons and I believed they'll bounce back in months to come.

Unitech: Bought around 30 on 29-Nov-2012 and sold around 39 on 18-Jan-2013

Moserbaer: Bought around 5.8 and sold at 6.95 in less than 2 months

Spicejet: Bought a little expensive at 45 but sold at minor profit at ~49

Suzlon: Committed mistake to not sell at 25%+ profits, but managed to exit at some profits

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)

Going forward, I'll stick to this plan and focus on studying, and post when I learn something new :-)

Happy Investing, and drive safely as the speed is increasing ;-)