Goals and Strategy: Source of Mess Up in Personal Portfolio
As a do-it-yourself investor, I enjoy the process of investing much more than finding my next company I will invest in. Admittedly, the process is much more challenging than finding the winning stocks. Yes, you read it right! Investing process is very difficult in many different contexts. Managing the portfolio requires wearing different types of hats. Sometimes you have act and behave like a leader, sometimes play the role of manager, and on many occasions you work like an employee.
Most of the investors spend a significant amount of time in looking at the quantitative part of the company analysis. We arrange data in different formats, different time scales, compare with analyst, check out google to see what others have to say, etc. In short, search and screen multiple stocks, collect data, and present observations and results. This is all about execution and is similar to what an employee will do. Is that really important? Have you asked yourself:
- Why this specific type of analysis?
- How you determine earnings per share?
- Is it only necessary to look at last one year or last three year or more?
- Do you include dividends?
- How do you decide multiples?
- How do you decide value?
These are all tactical aspects that are telling you how to analyze companies and what parameters to look for. As an example, let us assume you have more than 10 companies that pass your criteria, or you have list with mixed results. Do you know what to do? That’s where a manager puts your analysis in the context of total return or time frame. Managerial perspective puts multiple options and scenarios in the context of a pre-defined strategy.
- Which sectors to invest in?
- Are we increasing risk?
- Are we maintaining allocation or diversification?
- Is there liquidity?
- When should we buy or sell?
- Mutual funds, index funds, ETFs?
- Cash or short term investments?
Your strategy will decide which tactics (i.e. scenarios or options) will have higher chance of success. Your strategy helps deciding which tactics you have to execute to give you desired total returns in a given time frame.
- Does technical analysis, momentum, or swing trading make sense?
- Does fundamental analysis make sense?
- Top down? Bottoms ups?
- Which type of companies you will buy-n-hold?
- Which one will be short term opportunities?
- Which one will be arbitrage?
But then, how do you decide a strategy? You could adopt different strategies which contradict each other? Or they are confusing enough to hinder clear path. This is why clear goals are important. Goals have to be defined in such a way that they are specific and one can visualize them.
- What is our goal? Can you see 10 years or beyond?
- Can see as far as next year only?
- Which one matters the most 1 year or 10 year?
Most of us keep working like an employee spending inordinate amount of time in slicing and dicing the company balance sheets. We keep looking for the next winning stocks. But does that help us reach our 1 year goal or 10 year goals?
Majority of investors have superficial goals which in turn confuse their strategy. Tactically, they keep jumping from one stock to another in searching of those elusive multi-baggers. Identifying one or two multi-bagger or a brilliant stock pick will give you bragging rights in your daily chit chat, beyond that it has no meaning. Multi-bagger or few winning stocks in a given year is not going to help if your goals and strategy is messed up.
In my view, the biggest mistake in setting your investing goals is not able to set a long term goal. This ignorance poses the highest level of risk to our portfolios.
- Losing little bit of money in one or two stocks is not your biggest risk
- Stock market tanking is not your biggest risk
- Slowing of economy is not your biggest risk
- Reduced EPS in next quarters or next year is not your biggest risk
Your biggest risk is not able to meet your investing objectives in 10 years or beyond. The biggest risk is not able to develop and maintain asset base that is large enough to meet your needs in 10 years or beyond.
So as a do-it-yourself investor, you need to spend more effort in trying to remain focused on your goals and strategy. You have to put your portfolio build up and stock analysis in the context of your goals.
biggest portfolio risk, persoanl goals, portfolio management, portfolio strategy, stock picking
Tip Guy,
Very True.. Very very very true…
Wont say more, feel like a looser, cant forgive myself for long. i know i know it will pass away.
By the way The blunder was f*****g damn damn expensive,Wont repeat the blunder as i said on the chat.
Vik
Hi TIP Guy,
I am looking at hawkins after FY10 Results.
My past data refers to last 5 years.
I can see that NPAT growth is 50% CAGR
Dividend growth is 54% CAGR
Debt reduction is consitent.
So i carried out a DCF calculation and i found that Hawkins is fully valued at CMP (10% discount to Intrinsic value Rs.1300)
My pessimistic DCF model gives me Dividend of Rs.55 next year which gives approx 4.75% yield on CMP.
Will you please have a look again with latest numbers? whether it can be accumulated like SIP?
regards
MIP
Hello MIP,
Long time no see? Hope everything is going good at your end. Funny you asked about Hawkins. I have been pondering over it for a while about what to do.
First, on a personal note, I will not be accumulating. I do not consider it cheap at 1100+.
Second, I would be skeptical of sustaining the growth it has seen in last few years. When you have a business with high ROE, less capital needs, growing market of middle class, it becomes difficult for companies to sustain that level of growth due to competition creeping up. Other than brand image moat, it does not have anything unique in its product. There are already 10s of local suppliers, which over time will beat it on product pricing. I am not saying it is a losing preposition, but the growth rate will not be as high. It will still continue to grow at slow pace. So when I think from its future earning power (discounted to NPV), I think it is likely to be a between 1100-1500. I do not have exact math but it should in that range. So, why not cash it now itself? basically, the notion that it is high enough to sell based on my future expectation/guesstimate. I could be wrong on future expectation, but down side is I will lose future uptick (I don’t lose due to being -ve).
However, I love the way company is being managed, and good balance sheet. I think I would still like to keep it. Good managements are hard to find. For now I am keeping it.
In case, if there is another opportunity that I get interested in, I will most likely sell one third Hawkins.
Best Wishes,
Thanks TIP for detailed reply,
I regularly visit your wonderful blog, but hardly comment. Also I was busy with my work as well as finding some new opportunities, gathering data & all. I found Andrew Yule & Co. interesting so started buying in small qty.
recently Andrew touched it’s 52k low of 31.5. The company operates in Telecom, Engineering & Environment, Electrical, Lubricants, Industrial Electronics, Tea, Turnkey Contracts, Financial Services and Printing.
Half of it’s NPAT comes from tea, it has 15 gardens, and FY10 tea production was around 10 million Kgs. at CMP, tea plus other businesses makes it wonderful distressed business. This company is turning around since last 2 yrs. 95% holding is by Govt of India. This company holds Tide Water’s 26% stake. Rumors of this stake sale takes price of Andrew past Rs. 50 every year however i would be looking for a long term investment in this scrip.
Please provide your inputs on Andrew Yule if this fits in your criteria.
Kind regards
MIP
Hello MIP,
It does not fit my dividend based criteria. Furthermore, it does not look cheap even at 31. Considering cash flow and net assets, I would approximate 15ish.
Best Wishes,