A tepid year ends…


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To start with the positives

  • I managed to beat the market as well as the BSE midcap, Smallcap and BSE500 returns by a reasonable margin.( Concentrated Portfolio = 28%, Diversified = 25% vs around 9% for Nifty)
  • Portfolio churn among Emerging stocks was quite low as my selection of stocks was good. Cera, Supreme Industries, Kaveri Seeds, Kajaria, Mayur Uniquoters, SCUFL, ING Vysya, Fluidomat and Orient Refractories continued to do well.
  • I did take several tough decisions – including cutting weights of some of my core ideas(based on valuation concerns) as well as exiting some stocks when better options emerged.
  • I did a fair bit of work on smaller stocks & in sectors that I normally avoid(e.g pharma). In particular I figured out(finally after nearly everyone else did!) that Indian pharma had a lot going for it for next several yrs. Added Lupin & IPCA as core positions.
  • While I haven’t chased cyclical’s like everyone else my portfolio remains fairly well positioned to outperform once the economy gets back on track in the next 18 months.
  • I did bail out of stocks when my assumptions about them turned up false. e.g Exide’s q1 sales growth soon tapered down in q2. Back to losing mkt share again.
  • I did carry out a more detailed comparison of available options before buying any new stocks.

Since I don’t want to depress myself at the yr end so only listing the major disappointments ūüėČ

  • I did panic when financials crashed post Subba Rao’s emergency moves. Sold out a big chunk of ING Vysya for no apparent reason(It’s not a wholesale funded bank like Yes Bank). Thankfully better sense prevailed & I bought quite a bit of it back…not all though ūüė¶
  • I waited too long to sell my core holdings when working environment worsened for the medium term(Titan) or better options came to light(HDFC vs Britannia).
  • I took too long to cut financials in a sticky high inflation/interest rate environment. Started the yr at 27% of portfolio & only now cut to more realistic levels at 18%.
  • I continue to sell out/reduce positions in growth stocks too early. Despite experiencing that in bull mkts valuations do run up much more than you can predict. And often co’s hitting a sweet spot do surprise on the positive¬† with earnings.
  • I didn’t read too many books despite resolving to do so last yr. My to-read list keeps on piling up.
  • I still don’t keep proper records of my investment rationale for both buying into or staying away from companies. This leads to a lot of repetitive work when I have to rethink my positions in light of changed environment.

This yr I hope to become more organized with my investment process and keep trying to maintain the intrepid nature that an independent private investor needs to venture into the world of less researched companies.

Hits & Misses…

It has been a good market for smallcaps for the past 15 months so my portfolio has soared. Even the passive defensive portfolio I run has not done that badly(beat the mkt by 50%!). So I guess it’s time to relook at my stocks and figure out if some of them discount too much of the future. This is particularly important as the slowdown in India seems structural and will likely match if not exceed the one we witnessed in the late 1990’s. Only when faced with dire circumstances will our political machinery awake from it’s self induced slumber !

I’m still keenly looking into small companies in niche sectors that can grow in a slow growing economy. That policy worked for me in 2012 – Kajaria Ceramics, Kaveri Seeds, Mayur Uniquoters, Indag Rubber, Ajanta Pharma, Supreme Industries & Heritage Foods were the key portfolio drivers. Smaller financials like ING Vysya and SCUFL were on song too as the stock market sensed that rates were going to be cut. While many of these names are still likely to do well it’s important to not be complacent & keep looking at alternates. Over the past yr I did book out of some stocks like Sadbhav Engineering(slow execution), Supreme Infra(slowdown in new orders), Thangamayil Jewelery(rapid increase in debt), Dewan Housing(probable corporate governance issues in group companies), Carborundum/Tube Investments/ Setco Auto(end of cycle) and Indag Rubber(end of operating leverage ?).

I missed the cement boom over the last 12 months. Stocks that were on my watchlist did very well(Shree Cement, JK Lakshmi) but I couldn’t participate in the rally. Still trying to figure out if that sector has more steam left. My top cement picks at this point would be Madras Cement, JK Cement & JK Lakshmi Cement. Also would love to buy Shree Cement at 10-15% lower prices. Still no sign of any revival in commercial real estate/infrastructure spend so Greaves Cotton, Blue Star, Sanghvi Movers & Ratnamani which are now significant players in their niches continue to be subdued. Maybe the bounce will be in FY15 and not FY 14 as expected earlier. I might look to re-enter these stocks along with the likes of Sadbhav, Supreme Infra and MBL Infra over the next 15-18 months on suitable declines. Other interesting smallcap stocks that I’m currently accumulating are Cera Sanitaryware, Fluidomat, Rapicut Carbides, Kovai Medical and Manjushree Technopak. Depending on how they cope with the slowdown I’ll increase their portfolio weights gradually.

On the whole my investment process continues to be the same. I’m trying to allocate higher weights to my top ideas and be more selective. Maybe not increase no. of stocks beyond 25 unless we see a big revival in the economy(like 2004-05) that results in a lot of sectors booming. My active portfolio now has 14 stocks while the passive one has 23(to likely increase to 25). One of my oft repeated mistakes has been to book out of growth stocks after a rapid rise/one bad quarter(e.g Ajanta Pharma, Cera & V-Guard) Maybe it’s an indication that I need to be more clear at the outset about my investment rationale & have more conviction in the business. At times you do get the chance to get back at lower levels but I need to be more decisive. Most times I don’t change my stance while the initial assumptions made while exiting might turn out false in hindsight.

My Rock garden…

Among the various rocks turned over by me this year to try emulate Peter Lynch were some offbeat companies which I would never have read about in my usual sources for finding interesting stocks. Stocks like DFM Foods, Thangamayil Jewellery, Indag Rubber, Solar Industries, Carborundum, Tube Investments, Mayur Uniquoters & Setco Auto came from Online blogs, forums, little known investing sites or just my own snooping around quarterly results. I think these stocks along with other smallcap/midcap growth stories gleaned from research reports like Kajaria Ceramics, Dewan Housing, ING Vysya & Kaveri Seeds still have potential to give market beating returns.

Over the course of last 2 years I’ve mostly depended on research reports partly because in 2008-2009 high quality, discovered companies were dirt cheap and also since the 2008 meltdown did make me seek safer stocks. In hindsight that was exactly the wrong thing to do. There were 10-30 baggers available in smallcaps while I sought refuge in the safety of 4-5 baggers in better run midcaps/large caps. As we had entered a bearish patch from start of 2011, I was conscious to avoid getting too pessimistic and trying my best to find the same spirit of independence and¬†curiosity¬†that had led me to the Areva, Ratnamani Metals, Champagne Indage, Havells & Sanghvi Movers of the last bull market. ¬†My investing resume while having no bad eggs only had TTK Prestige & Hawkins as big multibaggers from the 2009-2010 period which exemplifies my misplaced caution.

I suppose the big returns from my pack of growth stocks could only be realised if the market itself reverses and enters a bullish phase again. And that seems to be at least 6-8 months away when rates are cut and inflation cools down a bit. That still leaves me with ample time to keep digging more gems or simply add to these stocks as more conviction builds in. Not bad from a portfolio perspective though I’ll be glad when the slog put in this year gets over…

My portfolio just got Lynched…

Going through some of my old investment books recently – starting with Peter Lynch. After being engaged¬†full-time¬†in the stock markets for 7 years you would think that I’ve inculcated most of the wonderful insights Peter Lynch shared in his 2 bestsellers – One up on Wall Street, Beating the Street. But I was wrong. It seems that I’ve picked up my fair share of bad investment habits. My portfolio almost resembles a Mutual fund these days. So I guess the mild¬†out-performance¬†over the BSE 500 in the last 1 yr should not be a surprise. I used to take far more chances, dig out stocks on my own, depend a lot less on research reports when I first started out. I also more or less didn’t spend much time on trying to guess the market direction or worrying over¬†macroeconomic¬†conditions. But the collapse in 2008 seems to have made me play a lot safer & hence suffer from somewhat underwhelming portfolio performance… at least relative to what I did between 2004-2007.

So I’ve been busy in the last 4-5 months overhauling my portfolio – introducing some smaller growth companies, sniffing out some value stocks and taking some calculated bets on turnarounds and cyclicals. Since I tend to stay fully invested some of my defensives had to be pared down. I’ve also exited the power equipment space since it seems on the verge of overcapacity. I’ve also sold most of my construction stocks at the start of the year since I figured interest rates will stay high and government lethargy has led to very little projects being awarded in the past 12 months. I’ve also exited many of the high-flying consumer stocks since they all trade at 35+ p/e. Some of these stocks have gone on to take out new highs but I guess one has to stay disciplined and exit when not comfortable with valuations. I’m reasonably confident that my newly revamped portfolio should outperform these consumer stocks over a 2-3 yr¬†time-frame.

After Lynch inspired so many¬†dramatic¬†changes now it’s time to re-read Phil Fisher & Warren Buffett. I actually expect there to be less impact on my portfolio but we’ll see…

Back to the roots…

Well you’re in your little room
And you’re working on something good
But if it’s really good
You’re gonna need a bigger room
And when you’re in the bigger room
You might not know what to do
You might have to think of
How you got started in your little room “

– White Stripes, Little Room, White Blood Cells