Fundamental: How much to put into equities?

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How much to put into equities?

Printed From: The Equity Desk
Category: Market Strategies
Forum Name: Fundamental
Forum Discription: Discuss the operations and finances of any of your companies.Make the other participants aware on the investment opportunities available in a stock on PE free cash flow etc
URL: http://www.theequitydesk.com/forum/forum_posts.asp?TID=387
Printed Date: 04/May/2025 at 8:36pm

Topic: How much to put into equities?

Posted By: surajmnair
Subject: How much to put into equities?
Date Posted: 22/Sep/2006 at 1:27pm

Dear Basantji,

I just happen to see your analysis on being 75% in equities and 25% cash.

It seems so interesting,exciting and it is true as well.

But shall I ask you something.

Investing personally its all fine since we stick to our own conviction and we know the size of our wallet including the risk apetite.

But when we spread our services to investors on a business basis, things are shaky.

Bcos an investor whom we manage always compares

His appreciation with capital invested.

His appreciation with sensex and index

And last but not the least, over one year period of time, his portfolio might have given a good performance till march 31 and for the same he incurs a capital gains tax on his profts. He pays it off after seeing the paper profit and when market tumbes down , the portfolio depreciates heavily and chances that it might go below his capital invested.

For that if we remain in 25 or 10%cash for the particular investor right from the word go irrespective of market conditions, he will complain that why we have not invested is entire money if the market goes up from there. If we invest on his behalf fully , then the complaint is why we are not sitting in cash.

What do you think?

Is it a good idea that we invest 75-80% of his capital in equities and rest in money market investments or debt instruments?

Or we can tackle the whole issue by investing in couple of good quality stocks like HDFC etc that you have mentioned which would recover earlier and rest in value ones.

I would appreciate if you can help all of us with analysis on this.

I would welcome suggestions form all boarders in this.

For computation purposes lets take and ideal capital investments of 5 Lacs and lets analyse how an ideal portfolio should look like and percentage of allocation. Lets forget the index levels for the moment.

Replies:

Posted By: basant
Date Posted: 22/Sep/2006 at 2:25pm

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Unless otherwise stated a person who manages portfolio has a mandate to be invested 100%. Let us assume that an investor who has Rs 500,000 wants to divide his portfolio between equity and cash as 75: 25. Therefore he has:

Equity: Rs 375,000

Cash Rs 125,000

Now if he hands over his equity component to a portfolio manager who wants to keep 20% in cash the effective cash equity ratio of the investor works out to:

With the portfolio manager: Equity @80% of Rs 375,000 = Rs 300,000

Cash @ 20% of Rs 375,000 = Rs 75,000

His personal cash holding Rs 125,000

Therefore his total asset allocation looks like Equity 60%(Rs 300,000) and cash 40% (Rs 125,000+ 75,000).

Because his portfolio manager wanted to time his entry and exit the investor's asset allocation has been severely hampered.

Now my point is to allocate as much as you want between equity and cash in totality (I have excluded commodities and real estate) and not to interfere between how much to hold in cash in the equity component because that will more often lead to chaos and confusion as I have tried to indicate in my post titled http://www.theequitydesk.com/forum/forum_posts.asp?TID=177&PN=6 - Why does it not make sense to get into cash partiually

Now how much an investor would like to allocate between these asset classes is very much person specific. I normally want to hold 100% in equities and try and make up for my living expenses from my income. If there is an emergency it comes once over several years we can use our credit card etc. But I have a very high risk approach to life and investing which might not be suitable for any one else. Have you read the link http://www.theequitydesk.com/world_equities.asp - How much to put into Equity?

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'The Thoughtful Investor: A Journey to Financial Freedom Through Stock Market Investing' - A Book on Equity Investing especially for Indian Investors. Book your copy now: www.thethoughtfulinvestor.in

Posted By: surajmnair
Date Posted: 22/Sep/2006 at 3:05pm

Basantji,

Thank you very much for the insight.

Lets take 100% investment in equity alone and the amount is 5 lacs per se.

In this case , how we allocate his equity portfolio amoung different companies - the so called steady compunders, emerging comanies., value buys and multi baggers.Sir, i would welcome if you could frame with an example portfolio as now we have different companies in our wish list like HDFC - steady compunder

HDFC Bank

TV18 - future mulibagger

Century textiles/ bombay dyeing- usually first company to recover sfter crash.

Rain commodities - Multibagger

Mc Dowells - Emerging company

Pantaloon etc.

I beleive this where the real insight is.

Second to keep in mind is his risk portfolio while allocating shares to him.

Basantji, would be grateful if you could answer this to add to our knowledge book.

Posted By: basant
Date Posted: 22/Sep/2006 at 3:41pm

ALthough how hard I try I think that this is very very difficult for me to answer. Risk is person specific while returns are generic so we cannot mix them. Ideally one should have

1) 60%-70% in sector leaders

2) Less then 30% in http://www.theequitydesk.com/forum/forum_posts.asp?TID=279 - cyclicals (because it is a specialised sector)

3) Other allocations are strictly dependent upon the investor's preferences.

Posted By: Equity Buff
Date Posted: 22/Sep/2006 at 11:55am

Dear Basant,

Would you suggest following:

A) 35% of portfolio in fundamentally strong Large Cap stocks (blue chips in the A Group, but not cyclicals).

B) 55% of portfolio in fundamentally stong Mid Cap growth stocks, which are sector leaders in growing sectors like Retail (Pantaloon, Trent), Media & Entertainment (TV 18, ENIL, Adlabs) etc.

C) 10% of portfolio in good growth oriented small cap stocks.

Rgds

Equity Buff.

Posted By: Equity Buff
Date Posted: 23/Sep/2006 at 7:26pm

Dear Basant,

Awaiting your reply on my above post (pls take your time if you are busy).

Rgds.

Posted By: basant
Date Posted: 23/Sep/2006 at 9:28pm

A) 35% of portfolio in fundamentally strong Large Cap stocks (blue chips in the A Group, but not cyclicals).

B) 55% of portfolio in fundamentally stong Mid Cap growth stocks, which are sector leaders in growing sectors like Retail (Pantaloon, Trent), Media & Entertainment (TV 18, ENIL, Adlabs) etc.

C) 10% of portfolio in good growth oriented small cap stocks.

________________________________________________________

Sorry, it just skipped my mind..You could increase (c)a bit at the cost of (b) maybe 5%- 10% because the real winners will come from (c) and if you can get a sector leader in (C) please do let us know. Smallcap sector leader is the best case for a multibagger!

I would have the followinbg definition for alarge/mid and a small cap:

Large cap - Rs 2000 crores +

Midcaps- Rs 500 crores - Rs 2000 crores

Small cap - Less then Rs 500 crores.

Many people take a large cap at Rs 4500 crores+(US $ 1 billion) but in the Indian context we need to revise that a bit. ALso Pantaloon is now a large cap by any definition. It started as a small cap (Rs 80 crores).

Posted By: Equity Buff
Date Posted: 23/Sep/2006 at 10:33pm

Thanks Basant,

Yes, I forgot Pantaloon is most certainly a Large cap today and no longer a Mid cap.

Want your views on following if hypothetically one were to construct a new portfolio today :

35% of portfolio Large cap stocks:

4 stocks with approx equal weight (8.75% each).

50% of Portfolio Mid cap stocks:

5 stocks with equal weight (10% each)

15% of Portfolio Small cap stocks:

5 stocks with equal weight(3% each).

Thus total 14 stocks in portfolio.

Will appreciate your comments in terms of portfolio weightage given in Large Cap, Mid Cap, Small Cap and also the number of stocks in each category: Large cap (4 stocks), Mid cap(5 stocks) and Small cap (5 stocks).

Based on company performance, as time goes by, one can increase/decrease the weights in individual stocks in each of the 3 categories Large cap, Mid cap & Small Cap but still maintaining the overall category weights Large Cap (35%) Mid Cap (50%) and Small Cap (15%) the same.

Await your views.

Thanks & Rgds

Equity Buff

Posted By: basant
Date Posted: 23/Sep/2006 at 10:42pm

This looks quite appropriate. In fact most of the institutional investors work under such guidlines but a portfolio of such pattern should really do well.The objective should be to get a 10 bagger in 10 years (26% CAGR) which by the kind of opportunities available in India appears quite possible.Just try and get more then 50% of the overall portfolio into sector leaders (hope I am not overspecifying it).

While these are broad parameters you would change them a bit from time to time depending on the opportunities available.

Posted By: Equity Buff
Date Posted: 23/Sep/2006 at 11:25pm

Dear Basant,

Many thanks for your quick reply. Just wanted to say that in case some of the companies dont do well in terms of performance one could remove those from the portfolio and add new stocks in its place. The process of increasing/decreasing/add new/remove stocks in each category Large Cap, Mid cap, Small cap should be a ongoing one based on how each of the companies performance pans out over time (few quarters) however keeping the category weightage of Large Cap (35%), Mid Cap (50%) and Small Cap (15%) the same.

Pls comment shouldn't this be the strategy ?

And yes you are not overspecifying by saying "just try and get more than 50% of the overall portfolio into sector leaders.

Thanks

Equity Buff

Posted By: basant
Date Posted: 23/Sep/2006 at 10:23am

The process dhouls be an ongoing one. We would look at performance with respect to rising EPS even if price does not go up for a couple of quarters it would not matter as long as EPS goes up the stock price WILL have to move up.

Taking a leafy out of Kulmanji's book:

"Often there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key to making money; it pays to be patient, and to own successful companies" - Peter Lynch

Posted By: Equity Buff
Date Posted: 23/Sep/2006 at 10:49am

Yes Basant,

If you see my post I mentioned monitoring Company performance and not stock price performance. If the Companies continue to perform well (good growth in top line, bottom Line, EPS, Return ratios etc.) the Stock price WILL have to move up at some point in time. Stock prices are slaves of Earnings.

Yes, it pays to be patient because many a times stock price may not go up in the short term eventhough Companies earnings are growing. But then at some point the Stock prices will go up substantially to reflect the companies growth in earnings.

Thanks.

Posted By: basant
Date Posted: 23/Sep/2006 at 11:00am

initially I used to get perturbed when EPS increased but the prices went nowhere. Today I get perturbed when prices go up without any rise in EPS . I mean it. ANd if EPS keeps going up not the price the stock becomes cheap and we could buy more of it!

Posted By: Vivek Sukhani
Date Posted: 23/Sep/2006 at 11:55am

Actually Basant, I beleive there are other issues as well besides EPS and its growth. The concept of story based investing plays a spoilsport most of the times. And besides, there are price mongers in this market as well. The techie guys also help in explosion and implosion. Then are supply side factors. I can name you many companies whose performance are rocking yet because they are so closely held and the supply is so pathetic most of the traders simply dont like to touch them. I have been a victim of this in some of the cases like Porritts and Spencer Asia, Foseco india...but then Thats The way It Is!!!!!

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