Risk Analysis of TIP Portfolio – 1H09

Any long term investor will know that they need to manage risk in their portfolio. The way individuals should manage their risk is asset allocation and diversification. Today, I am discussing how I manage risk in our income portfolio. The objective of this risk analysis is to make sure that TIP portfolio is not exposed to any particular event, or company, or any other aspect that will affect portfolio performance.


My portfolio management process has a risk management process in which I try to:

  1. Maintain pre-determined asset class allocation;
  2. Maintain pre-determined diversification, any sector should not exceed 10%;
  3. Any single stock should not exceed 7% of the portfolio;
  4. Dividends from a single stock should not exceed 5% of total dividend cash flow.

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Income Portfolio – Quarterly Update 1H09

updateOne common question that I continue to receive is about the efficacy of long term investing. The notable factor is almost all of them use two specific examples to explain that long term investing is not a viable solution. These examples are (1) Stock market tanking in 2008; and (2) Satyam going kaput.

To begin with, it tells me that many do not understand what is investing. Folks who ask these questions do not understand long term investing. I keep wondering, how to best explain what is long term investing.

In general, first half of 2009 can be characterized as roller coaster ride. While we saw multi year lows, at the same time, we also saw historical one day rally. In my post bull running for red flag, I showed that majority of SENSEX companies are showing reduced earnings. And surprisingly, it is being rewarding by increase value. I continue to believe, there is no way any individual can predict the markets. So who bother wasting time on it?

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Tata Investments: Attractively Priced Dividend Stock to Invest

logo_tataTata Investment Corporation Limited (TATAINVEST) operates as an non-banking financial company. Its primary activity is to invest in long-term equity shares and other securities of companies in a range of industries. It is also engaged in management and distribution of mutual funds. TATAINVEST operates as a subsidiary of Tata Sons Limited.


One notable aspect that I personally like about TATAINVEST is its business model. This revenue and profitability comes from dividend income and profits from selling investments. Majority of its long term investments are in blue chip companies that have good cash flow and profitable businesses.

Trend Analysis

The whole reason for any business to exist is to generate sales revenue and make more profits. At a minimum, the parameters listed below should have continuously increasing trends. All the data below is based on last 8 years i.e. from 2001 to 2008.

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NIFTY Expected Returns for Different Trading Time Scales

monthly-dividend-portfolio-reviewI presented a long term view about expected return for SENSEX. I mentioned that the compounded expected return was 12.1%, while the arithmetic average was 16% per year.

Today, I am discussing the short term perspective using a NIFTY index. Similar calculations can also be done using SENSEX, but I believe NIFTY is a better representation. I calculated daily returns, weekly returns, and monthly returns for NIFTY from August 2002 to May 2009. In all three cases I have used average closing value on a given day, given week, and given month. The table below shows the summary for these results.

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Expected Returns from SENSEX Index

I conducted a poll on MoneyVidya site to get a feel of what users understand about the expected returns on yearly basis from SENSEX index. In the image below, you may see the question that I asked in the poll and four options that I gave to the users. The poll received 54 votes out of 2000+ users at that point in time. That is approximately 2% to 2.5% as a sample size. With this small sample size I do not think we can draw any conclusive results. However, I do believe that it is an indicator and demonstrates the directional trend.

Poll on MoneyVidya - Expected Return

Poll on MoneyVidya - Expected Return

Based on my calculation from Year 2001 to Year 2009, the compounded expected return for SENSEX was 12.1%. At the same the arithmetic average was 16% per year. Majority of the user in this sample size (52% or 28 users) said the compounded return for last ten years is between 11% and 20%. At least based on this small sample size, the majority of users on MoneyVidya site seem to have realistic expectation.

I performed this poll with a long term view of more than 2 years. So it is likely that many of user may wonder whether it makes sense to provide a long term perspective.

In my next post, I will discuss short term returns using NIFTY index.


Indian Stocks Mania – June 15, 2009

Welcome to Indian Stocks Mania 5th edition. It is likely that readers may find post that are not representative of the Indian Equity Markets. However, the concepts presented by authors can very well be applicable to Indian Investors.


This edition of the carnival received a total of 24 articles of which 14 have been included. Although I enjoyed reading all 24 articles, I did not include all of them because (a) they were outside the subject domain of this carnival; and (b) they would have not been relevant to the readers of this blog. Thank you to all of them who submitted their articles to this carnival.

While you are here on my blog, I encourage you to read few posts to get a feel of India’s Investing scene. For your ease of navigation, the popular posts are listed on side bar on left hand side. I am sure you will enjoy reading!

General Investing

Jae Jun presents The Art of Selling Stocks | Old School Value posted at Old School Value, saying, “Buying a stock is only the first half of the equation. It is the easy half. Knowing when to sell and having a strategy to lock in gains is even more important.”

ABC presents Stock Prices Do Not Represent Stock Value (or Company Value) posted at ABCs of Investing, saying, “A lower priced stock isn’t “cheap”.

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TIP Blog – The Next Quarter

I have been focusing on writing about long term investments and attempting to show the virtue of patience, efficacy of well defined plan, and importance of following your own investment process. Most of the time I have focused only on dividend based investing at a fair value and I will continue doing that. I plan on adding few topics. During this next quarter, I am going to do following:

Publish Quarterly Progress Update

I have received quite a few messages that express fear factor about long term investing. Many individuals are not able to grasp 10+ investing horizon. Many cite example of Satyam and SENSEX tanking in 2008 to show that stock market is a gamble and it is just not right to think in 10+ years of time frame. For many of my readers, long term means 2 years. I find this very intriguing. In this context, I have decided to publish quarterly update of my portfolio. My objective in publishing this quarterly update will be to demonstrate to my readers, how I measure my progress, and how I manage the risk in my long term portfolio. I will be publishing my quarterly update only once. After that, I will be emailing it only to RSS subscribers of this blog. Continue reading rest of this article…



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