Quality At Any Price Vs Quality At Reasonable Price - Year 1 Update

Image Courtesy: Freedigitalphotos.net/mapic hai

Last year, I started to track the performance of two distinct portfolios.  You can refer to the post here.  The first portfolio consisted of high quality high PE stocks and the second one consisted of reasonable quality low PE stocks.  Idea was to compare how these portfolios perform over long periods of time.  This is just the first year and the clear winner for this year is Portfolio 1 which is high quality high PE stocks. While this seems to be in line with what experienced value investors say, we need to observe and check if it stands the test of time.  We will review it next year and check how these portfolios have performed.  For those that are interested in the details, the portfolio valuation and returns as it stands today is given below.  Those stocks with an asterix (*)  mean that the price has been adjusted for bonus and splits.

Portfolio 1 :

Portfolio Annualized Return :  21.54%

Stock	Year 1			Year2
	Price	PE	Invested Amount	Price	PE	Current Value
Jubiliant Foodworks	1340	76	10000	1524	83	11373
Page Industries	10743	68	10000	12969	67	12072
Symphony	1909	62	10000	2321	65	12158
La Opala	410	62	10000	612	70	14927
Berger Paints *	253	53	10000	252	57	9960
Britannia Industries	1793	52	10000	2910	54	16230
Pidilite Industries	484	50	10000	553	46	11426
Astral PolyTechnik	420	46	10000	432	71	10286
GSK Consumer Healthcare	5807	45	10000	6691	45	11522
Dabur India	239	43	10000	277	42	11590

Portfolio 2:

Portfolio Annualized Return :  6.19%

Stock	Year 1			Year2
	Price	PE	Amount	Price	PE	Current Value
Munjal Auto Industries	113	11	10000	93	19	8230
Zensar Technologies	596	11	10000	1038	15	17416
VST Tillers	1349	13	10000	1350	17	10007
eClerx Services *	897	15	10000	1484	25	16544
Wipro	557	16	10000	557	16	10000
Swaraj Engines	934	16	10000	956	25	10236
VST Industries	1912	17	10000	1662	19	8692
Kaveri Seed Company	782	18	10000	347	11	4437
Suven LifeSciences	210	18	10000	267	36	12714
Tech Mahindra *	653	21	10000	517	18	7917

Quote on Patience

"It's waiting that helps you as an investor, and a lot of people just can't stand to wait. If you didn't get the deferred-gratification gene, you've got to work very hard to overcome that." -  Charlie Munger

This is very important and a relevant quote.  All of us are action oriented and keeping quiet is very stressful.  With the current market conditions in both equity and real estate, it is better to keep quiet and stay in sidelines than invest.

Company and Promoter Quality Check

Pic by Stuart Miles /freedigitalphotos.net

While making any investment, the common pitfall that investors fall in is just to focus on the size of returns they get without checking how much of risk they are bearing to get that return.  If the probability of losing is higher, then the expected outcome would  be lower even if the absolute return looks higher.  To put it in simple terms, you are more likely to invest in a bank Fixed Deposit offering 8% return if you are confident about the bank than giving it to an individual who offers you say 24% return on the same amount.  Reason for that is that the risk that individual does not pay you is higher than the risk that they bank would not pay back.  The biggest risk in this case is not return on principle but return of principle. When we invest in a company FD or in a company stock or its other debt products like debentures etc.  it is important that we check the leverage level of that company and also its credit rating before choosing to invest.  In addition to checking the company it is also important to check if the promoters/managers have ever had any other governance issues before.

With the power of Internet, it has now become a manageable exercise and given below are some of the ways to check the company and management quality.

• Check the watchoutinvestors.com site.  This is a free website sponsored by NSE and BSE which is a great place to search for any relevant issues in connection with the Company or Promoter.  As per the site, they cover individuals/companies who
• Have been indicted for economic default and/or
• Have been non compliant of laws/guidelines and/or
• Are no longer in specified activity
• www.consumercourt.in is a good source to check on all the court issues with that company or individual.  If they defaulted on deposits before and some one reported it would be there.
• Also you can check some of the consumer complaint forums like http://consumercomplaints.in/ and others to check if the company has any relevant complaints reported by customers.

If you find that there are records in any of these sites  that suggests that the company or the management quality if questionable, avoid investing in equity or debt related instruments with that company.  This would save you a lot of money and emotional trauma.  In Charlie Munger's words 'All I want to know is where I would die, so I don't go there'.

Happy New Year

Wish everyone a very happy and prosperous 2015
.

2014 Goals Review

At the beginning of the year, I set portfolio goals for the year 2014 which were to be reviewed at the end of the calendar year.  It is time now to review now my performance against the stated policy goals.  There were five goals which were set.  Not all of them were SMART goals.  Some of them were broad policy goals.  I think I did good in some of the goals set whereas not so good in others.  Market has given some handsome returns but none of the goals were tied to what returns the portfolio generated.  These are tied to the process discipline.  Once we take care of the process discipline, the returns would take care of themselves.  Okay this how I performed against the goals.

Goal # 1 : Evaluate only business performance and not price performance

In both the annual report review and the quarterly report reviews, I have been reviewing only the business income and not the prices. However, I have provided only quarterly updates consolidated based on industry grouping.  So, I would give myself a 'B' against this goal.

Goal # 2 : Reduce the number of businesses to 20 or below.

At the beginning of 2014, I had around 24 stocks.  We closed this year with same number.  There were about 7 stocks that were added new this year and around 7 sold.  While the quality of the portfolio got better, the number could not be brought down.  So, I think i failed against this goal. I would rate myself a 'D' against this goal.  Hopefully, i get there next year.

Goal # 3:  Improve quality of businesses

Key reason for the number of portfolios remaining the same and not reducing was that in most of the cases, cyclical businesses that I no longer wanted to hold were sold and replaced now with better businesses and the overall portfolio quality has definitely got better.  There is a lot of scope for improving this and making it better.  I will give a rating of 'B' on this goal.

Goal # 4: Bet big on high conviction businesses

I have increased the bet size but due to the quick run up of the stock market I could not accumulate enough. Since July there has hardly been any investment done.  Purely from reaching the goal set standpoint, I will rate myself a 'B' against this as well.

Goal # 5:  Do not lose money

I have not lost money in any of the investments that I invested this year or the ones that I exited.  I will give myself a 'A' on this one.  

Overall it was okay performance with some scope for improvement.  Next year I will work in improving my portfolio quality while at the same time reducing the number of stocks to 20 or below.