"We do not have to be smarter than rest; we have to be more disciplined than the rest.” ~ Warren Edward Buffet
There is a deep myth that creating a portfolio of a handful of good companies requires a higher degree of intelligence and can't be performed easily. In reality, creating a portfolio which could create an enormous amount of wealth for you, in the long run, is all about how much discipline you have adhered to throughout your investment journey.
It has more to do with the behavioural discipline that one has extended while stock selection, rather than putting entire efforts to figure out-of-box stocks, that may one-day lead to some dead end, throwing you out of equity market investing for the rest of your life.
It is well said that; “Wealth is the only outcome of the game of money, if you play the game well, the money will be there”. But the fact is that a vast majority of equity investors try to earn unexpected gains in a shorter span of time through their range of sheer genius to occult magic strategies, and when the significant losses occur, they try to recover entire losses by putting all their efforts to identify one uncommon stock, which is not on the others' radar and allocate a large portion of their available resources, which in their perception is going to be the next multi-bagger and the one which will recover entire losses with unusual gains as well, but unfortunately they end up losing everything and start criticising that it is market phenomena which is responsible for their condition. But the reality is that they lose their money because of their indiscipline in investment approaches and not because of the market volatility.
Here in this article, we will be discussing some portfolio strategies which has time and again proven right and turned the fortune of many investors in the past;
- “Identify and buy” companies who have shielded their business with competitive moats.
- Do not look for businesses who are trying to be the best or to be the leader. Identify businesses who are idiosyncratic and focused on maintaining that uniqueness. Trying to be the best does not lead to the Return on Capital Employed (ROCE) greater than Weightage Average Cost of Capital (WACC) or ROCE > WACC, on the other hand sustaining uniqueness does.
- Company’s price charged for their individual products tell you a lot about the company’s offerings. If the company is able to charge premium prices for their offerings against all their competition for an extended period of time and is able to retain their clientele, then their products are carrying uniqueness and would help it to encash that uniqueness to boost its earnings and footprint expansion.
- A fundamentally strong company commands respect in the business community, attracts the best talent available in the market and more often its stocks trades at a premium valuation in the stock market against their peers.
- Asset allocation – Do not diversify too much
- It is well stated that; too much of diversification is needed only when investors do not realize what they are doing. Investors should focus on developing a concentrated portfolio of 10-15 fundamentally strong stocks and stick with that portfolio for an extended period of time.
- The notion of developing a concentrated portfolio is that it can outperform an actively managed portfolio over the long-term period.
- Time and again, it has been proven right that a concentrated portfolio of 10-15 stocks built upon through research and analysis has handed enormous amount of wealth to the investors. Although, it’s not a guarantee that each and every portfolio constituent will turn a Multibagger in future, but even if two or three turns to be a Multibagger, and rest are able to deliver above the risk-adjusted nominal rate of return, they will be enough to make investors millionaire.
- We also emphasise on creating a portfolio that is a mixture of large-caps, mid-caps and small-caps. Do not focus fully on mid-caps and small caps, because of their characteristics of higher volatility based on rumours and talks surrounding to them. Also, your consolidated allocation towards the mid-caps and small caps should not be more than 50%. However, you can keep on buying these stocks as they grow and enter the club of large caps.
- Valuation matters
- It is true that companies create value through their operational excellency, and even in today's world, many equity investors bang on operational excellency to maximise shareholders value in the long run. However, in the modern world, an increasing number of corporate actions ranging from merger & acquisition, share buyback, minority interests and many others could significantly affect shareholders return and investment value. Here the role of valuation becomes important.
- A fundamentally strong company is not a guarantee, that would lead to enormous wealth creation, as that strength could already be priced in its stock prices and any unfavourable news or event for the company or industry in which it operates in, could create massive losses. Therefore, one should avoid hallow effect for a company built upon the past performance as prices at which one is looking to "Buy" may be overstretched and far away from its intrinsic value, what we can call these stocks as "overvalued" stocks. One should never overpay for any investment assets despite how good it has been in the past. Wait and monitor the developments very closely, because, in the long run, an underlying cannot trade sustainably too far from its intrinsic value. In long-run prices are supposed to tilt towards the true and fair value of the underlying asset.
As we have mentioned at the beginning that, "Wealth is the only outcome of the game of money, if you play the game well, the money will be there" is certainly very important. Many investors foray into equity investment to make money quickly, their entire focus is concentrated towards making money, and during the course they play the equity game in a casual manner, which leads them to significant losses. Therefore, one should pay attention to playing the game in the best possible disciplined manner and money will consequently chase your intelligent decision in the game.
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