Portfolio Investing: The Key to superior returns in market
Approach and attitude for PORTFOLIO INVESTING:
The KEY TO SUPERIOR RETURNS with ADEQUATE DIVERSIFICATION:
You have already seen our explanation on ASSET
CLASSIFICATION and ASSET ALLOCATION. It integrates and embodies the very
important concept of PORTFOLIO INVESTING. We will understand about it in this
article.
Don’t think this is some hi-fi, hni type,
academic or finance-jargon!
In our view, portfolio investing is simply a
strategy, or attitude or approach towards investments. For example, you want to
invest. And by that we don’t only mean investment in equities (stock-markets).
We mean, with stocks, investment into debt, real estate, mutual funds,
commodities, local/indigenous businesses (we will explain this letter on).
Now this is a portfolio of investment. In
finance/investment many people call it asset allocation and then
diversification and may be some other names that we’re not yet aware of! Some
also call it diversification. Ultimately it’s a portfolio of something, here
investments.
Here we want to explain portfolio investing
for equities.
But, at the first place why it is so important
that we want to talk about ‘portfolio investing’?
It is very important to read the answer for
this. Many of you invest in anything (here, stocks) in complete isolation.
Meaning thereby you pick a stock and invest in it. Sometime later you pick
another stock and buy it. Let’s not talk about how you pick it.
Are you getting it?
Most of you most of the times, invest in one stock at a time and independent of some holistic and object oriented investment plan. (of course, unless and until you are investing in a mutual fund scheme). Thus you are always feared and prone to one or many of the ahead listed say, ‘overconcentration’, ‘over-diversification’, ‘inferior returns’, and so on.
Most of you most of the times, invest in one stock at a time and independent of some holistic and object oriented investment plan. (of course, unless and until you are investing in a mutual fund scheme). Thus you are always feared and prone to one or many of the ahead listed say, ‘overconcentration’, ‘over-diversification’, ‘inferior returns’, and so on.
Thus, less than average people out of you lose
money in the medium run, and generate inferior returns or worse capital loss in
the long run. Say, you may have invested in Reliance Communication at 600 or
800 Rs. and now what is the price? Rs.100, not even 100! But, suppose, you
didn’t had any idea about bubbles, valuations, bull and bear runs, or never
believed in market timing; and still have diversified into a certain number of
limited stocks with inter sector diversification. And may be with a good
valuation for some of them; if you were either lucky or intelligent enough to
do so. Then in that case you may have saved yourself from the losses you
generated due to ‘investing in one stock in isolation’, as well as getting no
benefit of the following bull market.
Please note here, we are not and have never
advocated for mutual fund schemes (except for some extremely good schemes and
schemes for which substitute in secondary market is not available, or for a
very small investor, investing through SIP route for a very longer duration).
Everyone have known how and why mutual fund AUMs are coming down despite rosy
conditions in the stock market and les schemes have been able to even recover
what they lost in last crash.
Thus PORTFOLIO INVESTING is opposite to
investing in isolation in any one stock, and rather looking at any stock as a
constituent to you whole ‘equity portfolio/special sub portfolio’ or ‘theme’
within the equity portfolio.
For example, in our opinion, a normal
investor’s ideal portfolio should consist largecap, midcap, smallcap, as well
as penny stocks too. These are generalized classification, as far as we are
concerned we use many different classifications and approach. Even among these
popular classifications, we sometime define them differently than what usually
market participants do.
So, you have understood that each stock should
not be bought and looked at in isolation, but as a constituent of a portfolio.
This is what we call PORTFOLIO INVESTING attitude and approach. It’s the art and science of right trade-off
between concentration and diversification that make this method (it’s
not a method but an approach and style) successful.
In fact, knowingly or unknowingly, successful
investors become successful due to the working of this approach.
One thing also to keep in mind is that when we
say that a stock is a constituent of a portfolio and is not looked or invested
in isolation. It is always certain proportion to the portfolio. This basic
logic is what makes it a constituent and an important constituent of a
portfolio. There are more quantitative and qualitative logics to it.
So, thus portfolio investing is not a choice
but compulsion, it is not any modern concept but a fundamental trait of success
in investing. Good asset allocation strategy and active monitoring and
shuffling is important advanced levels into it.