Annual portfolio review – 2009

I usually review my portfolio towards the end of the year and try to figure out what went right and where I goofed up. I disclosed my portfolio last year and the portfolio has remained more or less the same since then. I sold off some small positions such as India nippon, manugraph etc and have added to other ideas such as LMW, Ashok Leyland and other existing ideas, which I felt were cheap during the course of 2009. So how did it all turn out? well far better than I expected at the beginning of 2009. A summary of the results follows

Stock % change Gujarat gas 105% Novartis 105% Merck 91% Balmer lawrie 124% LMW 171% BEL 143% NIIT Tech 144% Patni 254% CRISIL 84% Maruti 185% Grindwell norton 80% Honda siel 68% Ashok Ley 222% asian pts 99% Concor 103% Sulzer india 45% ESAB india 111% HTMT global 228% Others 130% Index – nifty 71% nifty midcap 96%

I have compared the returns on the stocks with the nifty (large cap) index and the midcap index as several holdings in my portfolio are mid caps and hence it would appropriate to compare them with the midcap index.

The reason for comparing with the index is straightforward. If one has to pick stocks, then the picks in aggregate (not necessarily each) have to do better than then index, otherwise one is better off buying the index via index funds and not wasting time and energy on picking stocks.

So what grade do it get ?

I have given myself a B for picking stocks and a B+ for having the patience and confidence in buying and holding the picks during the terrible drop in the markets. The stock picks are not phenomenal picks in themselves. It was very easy to find undervalued stocks during the Oct 2008 – Mar 2009, but difficult to buy and hold them. As an analogy with cricket, my picks are like singles and doubles, occasional fours and a very rare six. I am unlikely to lose my wicket on a reckless shot, but watching me play would kill one with boredom :)

Reviewing the picks

A few picks standout in the above list – namely Merck, CRISIL, Grindwell Norton and Honda siel. ESAB india and sulzer don't count as they are fairly recent picks. These picks have done poorer than the index and hence are worthy of deeper attention.
I have written about merck earlier here. I still feel it is undervalued and plan to hold on to it. The main reason for the underperformance is that the fundamentals of the company have not improved as expected over the years and hence the stock market has not given it a decent valuation.

CRISIL has performed as expected. The company was not as undervalued as some other stocks last year and hence the gain has not been as high. Grindwell Norton and Honda siel have not perform as well as some of the other companies and hence the stock performance has not been as good as the index.

A few other picks such India Nippon, Manugraph were clear goofups bought during the bull market and exiting them was a necessary decision. I don't expect to have a 100% success rate in picking stocks and it should still work out fine as long as my mistakes are smaller than my successes. For the time being, that has been so.

Is an annual review sensible

I have continuously harped on the need to have a long term view. Is it sensible to evaluate a portfolio on an annual basis ?

I personally think that any outperformance or underperformance over a year is usually a matter of luck. However it still does not mean that one should not evaluate the picks atleast once a year and see what worked and what didn't

Conclusion

My conclusions for the year has been as follows

• Majority of the returns for the year have happened as the market corrected the undervaluation of midcaps. This is unlikely to happen in 2010 as there are not as many undervalued stocks out there.
  
• It is important to understand the difference between a cyclical drop in demand and permanent change in industry dynamics. 2008-2009 was a cyclical drop for several industries such as auto. The same is however not true for telecom which is undergoing a structural change.
  
• It is important to bet big when the odds are in favor (price is low). It is also important to ignore the chatter in the media which is as best a distraction.
  
• I was lucky in 2009. I don't expect to be as lucky in 2010 and will have to work harder to get decent returns.

So whats next ?

I really don't have a crystal ball for 2010. I have no clue whether the market will go up or down. My approach has remained the same for the last 10 years and will be the same in 2010 – buy when the stock is undervalued and sell at intrinsic value or higher – market forecasts be dammed.

That said, I expect it to be more difficult to generate good returns in 2010 and beat the market.

Final note : The above listing is not entirely indicative of my returns as all the holdings are not equal weighted in the portfolio. Some holdings such as LMW and ashok Leyland have a higher wieghtage than the others.

As I read somewhere – its better to be lucky than smart. Well, 2009 was a very lucky year.