October 17, 2008

Change in portfolio structure

Over the past few months I have modified my portfolio structure a bit. I have now divided my portfolio into two portions. The core portfolio, consists of companies where the intrinsic value is increasing and i have a higher level of confidence about the company. The other portion is more of a graham style portfolio. This consists of companies which are extremely cheap based on the various measures such as market cap less than cash on book, ultra low PE or market cap less than net current assets.

The core portfolio is a larger portion of my total portfolio and has companies, for which I have done a deeper and detailed analysis. The ‘
graham’ portfolio on the other hand consists of the ‘cheap’ ideas. These companies may not score high on corporate governance or may not be a great businesses, but they are insanely cheap.

The idea behind this ‘cheap’ stock portfolio is to take advantage of the large number of opportunities, which are coming up in the market now. Ofcourse the number of stocks I plan to hold in the ‘graham’ styled portfolio could be between 15-20 or even higher versus 10-12 in the core portfolio.

So why this disclosure?
I will post on such cheap companies as time permits. I am planning to add them under the category of ‘graham’ type stocks – cheap stocks, but not necessarily great companies.

This type of value investing is also called cigar butt investing and it was developed in 1920s by the dean of value investing – Benjamin graham. This type of investing is low risk, involves quite a bit of diversification and works best during bear markets.

So please don’t be surprised if I post on ‘not so great, but cheap’ companies. One can get decent returns from such a portfolio, provided you have adequate diversification.

Is the stock undervalued?
I am getting several comments and emails asking whether so and so stock looks cheap. The odds of a stock being cheap these days are very high. If you pick 10 stocks randomly, I bet 5 will be cheap. However the question most of us should be asking is not whether the stock is cheap, but whether one understands the company well enough and will have the emotional fortitude to withstand another 20% drop in the stock price.


Krishna said...


Now that Oil prices have come down to around $80 and likely to go down further do you feel HPCL is a Graham Buy now ? You did put a post on the same few months back on HPCL .Would you like to revisit that post and have your opinions on that again .

Anonymous said...

I think these are the days forgetting the past mistakes and move on correcting them. I am also in the same mental situation, while i am building my "Core" portfolio by selecting companies carefully, i try to forget my mistakes made last year because of that i am now in huge loss. I take it as a learning. Expensive learning.


Rathin Shah said...

Hi Rohit,
Sounds interesting that you are deploying nearly 25% of Graham's category. Just wanted to ask, how much attention to the annual report should be given in this circumstances. (i.e. how much detailed analysis one needs to apply here)?
Also, where do u exactly find out of low P/B, Low Mcap/ sales etc...since it is not directly available on the leading websites...(now a days many stocks would be available on this criteria...so which stock we should buy?i.e if 15 stocks are there, should we buy all 15)
Secondly, when should we try to exit these stocks as we exactly havent calculated the intrinsic value?
Lastly, There is one IT co. FCS software...its now nearly available at 23 and its earnings are around 22...I am not great in understanding this co. business as it is more into IT infrastructure and consulting...but financials are decent...just consulting you on how should we determine the exit price though...
sorry for writing such lengthy query....but will appreciate if can answer the same...
Thanking you in anticipation...


Anonymous said...

you are right rohit.
can you plz go throught shirpur gold refin. and alchemist ltd

Manish said...

Hi Rohit,

Can you advise which companies you are putting in your "Core Portfolio" and which in "Graham Style Portfolio". I agree with you that more than 50% of stocks today will appear undervalued because "Mr Market" is depressed. I visited some of your old posts and know some of the companies that you have interest/position (e.g. Balmer Lawrie, BEL, NIIT Tech, Patni etc). Will you be putting your existing holdings also in these two categories or they will be part of your Core Portfolio.

Also I will be curious to know your strategies for these two portfolios. Will you be looking for a certain percentage of gain (say 50%) for Graham Style stocks and exit. I believe you will keep holding Core Portfolio forever (until business is intact).

You are sharing wealth of knowledge in your blog, I truly appreciate your effort.

- Manish

Vic said...

Hi Rohit,

Great initiative!! I think it'll help us all.

Personally, I have the emotional fortitude to withstand 50-60% drop if I enter in some stocks at these levels.
As long as I invest in good businesses at cheap.. I'm fine. It will reward in the long term..What's the rush!! :-)

I recall you had analyzed Castrol some times back, shouldn't cheap Crude help its bottomline?

Pls do share both portfolio, whenever u can.



i defer i agree said...

do give us the list in your core portfolio and the cheap portfolio also and let us all be benefited with your knowledge

Rohit Chauhan said...

Hi krishna
i exited HPCL as i indicated earlier. there are lot more attractive and better businesses available at throwaway prices. i wont be looking at hpcl anytime soon.

ani - anyone invested in the market has suffered decent losses. i would call it a loss only if you bought the company at a price higher than intrinsic value and now the price has crashed. otherwise it is just a quotational loss which will come back


Rohit Chauhan said...

Hi rathin

i have not fixed a % for the deep value portfolio yet. it will depend on the kind of opportunities which i can find.
in terms of analysis, i would still like to read the annual report and do some analysis. maybe not as deep as doing a DCF and all other stuff as the value is apparent on the face of it.

this no single website for all data. you can start with icici direct for low PE data and then add the other parameters. if you can find 15 such companies or more which are very attractive, you can invest in all. diversification is important
i would exit such companies when they reach intrinsic value. i have seen the company you mention ..but i am personally avoiding small cap IT


Vic said...


I have been tracking BEL for a while now and see the price again hit 52 week low @ 664 today.

I know you have some holdings and have suggested that this is very long term candidate. Are you building more position in this as the price is hitting new lows?

Is there any weakness related to its business that might be causing the drop (apart from the downfall of markets)?

I like the company and the analysis that you have done and feel it would good to build position in it from these levels. I will be patient for the results..:-)