Portfolio Management- Process of Reviewing

Update::

I have Exited Garware Wall Ropes. It appears cheap but if one looks at its RoE & RoCE numbers business it is not a great business. My fair value estimates were in range of Rs. 60-70, and giving a 50% discount to that my buying range would have been around Rs.35 which i think is also near to its 3 year lows. My buying price was 57, so took exit and plan to invest in other ideas.

Original Post given below::
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 In my last post i shared that i try to construct my portfolio around 3-4 themes. This time around I am writing on my methods of reviewing my portfolio. 

We all know that as soon as a stock enters ones portfolio one is immediately impacted by endowment bias (Details).Under the effect of this bias the simple task of reviewing portfolio and weeding out not so great ideas becomes a huge challenge.

To over come this I am trying to use decision tree method outlined below

Step 1:: Is this business good, bad or average and is this a business i understand? I don't look at numbers here but try to use some basic ideas like is it a no1 or no2 player in a segment, does it have pricing power, is it dominant player in niche segment, is the management honest etc to understand the business. For example I hold First leasing which is definitely an average business as it is a NBFC focusing on leasing business and doesn't have any of the above characteristics. Similary, I am not very confident in understanding chemical/pharma companies and hence i avoid them.

Step 2:: I then verify my above hypothesis by checking some basic numbers like past RoE, Cash Flows, Low Debt/Equity, growth rates, dividend payouts etc. 

Step 3:: If my hypothesis is correct and it confirms that it is a bad business or it is a biz that I don't understand then i try to exit that stock. Nothing is worse than holding a stock with bad business in the hope that price will rise. ( Unless you have some insider info)

Step 4:: In case though if its a good or average business then I move to the valuation bit.

• Step 4.1:: For average business I try to calculate the intrinsic value of the company using conservative estimates. Although, there is no fixed methodology for this but for pointers one can refer to this (Intrinsic value calculation) brilliant work by Vishal. Since the business is average i would keep the margin of safety(MOS) as high as 50%. Also, average business don't get re-rated very easily so one should think on what are the catalysts for getting this stock re-rated ( debt-reduction/PE investment/Stake sale) and what is the time frame for this event etc. 
• Step 4.1.1:: In case i hold a stock which doesn't meet my MOS criteria then i will try to exit the stock
• Step 4.2.2:: In case i hold a stock which meets the criteria then i try to evaluate it with stocks which are good business. In case the price of these great business are not right i hold on to these average businesses idea.

• Step 4.2 :: For good business I again try to calculate the intrinsic value of the company. For these business i keep a margin of safety around 25%. 
• Step 4.2.1 :: In case i hold stocks meeting my MOS criteria I keep adding the stock till my allocation limit, usually by selling the average/bad business ideas.
• Step 4.2.2:: In case the MOS is not available then i hold the stock and wait for the idea to be rightly priced.

I try to follow a similar process for a new idea. As said in my previous post i try to maintain 3-4 themes in my portfolio and try to do a similar check as above within these themes.

As of now I am evaluating if the below 3 stocks and hope to reach a conclusion soon.

1) First Leasing

2) Garware Wall Ropes
3) Ashoka Buildcon


Regards,
Saurabh

Portfolio Management- Thoughts on Portfolio Construction

As much as stock picking is important, equally important is portfolio management. Good portfolio management can help an investor to do right capital allocation and also help him in being consistent in his returns.

The commonly known method of classifying portfolios is either running a concentrated portfolio or to diversified portfolio. Generally accepted norm is that below 10 stocks a portfolio is concentrated and for diversified anywhere between 20- 50 stocks.

Making a portfolio would comprise off following steps

• Picking number of stocks basis your comfort 
• Assigning % allocation of funds in these stocks basis your belief in the stock.
• Ensuring that these are from different sectors and that their is no bias towards one sector.

Although, above method is the most prevalent method of making a portfolio, it also exposes once portfolio to biases which are a function of once investing strengths. Most of us have a bias towards certain theme of stocks like growth stocks, graham style stocks, turnaround stories, defensive bets etc. These biases are a function of past successes, comfort with these themes etc.

To overcome this bias i try to diversify my stock ideas on the below mentioned themes.

1. Cash Bargain/Asset Bargain- Piramal Healthcare, Bharat Bijlee etc
2. Growth Stocks with Moats- Oriental Carbon, Kaveri Seeds, etc
3. Constant Cash Flow Generation- NESCO, Swaraj Engines etc
4. Debt Capacity Bargains- Mazda Ltd, Poddar Pigments etc
5. Special Situations- For cash investments

If a stock idea doesn't fall into any of them I tend to skip it. Except for special situations each of the above themes has 3 to 4 ideas.When i review my portfolio i try to see that whether I am biased towards a certain theme. If i find that i have more number of ideas of a certain kind i then try to reduce stocks fitting that theme and try to look for opportunities in other themes.

This tends to ensure that amongst a theme only the best ideas remain in portfolio and also some other good stocks are not missed.

As regarding allocation between the themes, I try to equal weighted amongst them.

For Special Situations i try to utilize the cash portion of my portfolio, although ideally i would like to increase my allocation here.

Regards,

PS-Another key point is that each of these themes will have a different checklist which i think deserves another separate post.
PPS- I ha