Day 20 - Buying stocks - If you must

Its a full time business. Not a hobby. But most people treat it like one. Remember, you never make money off a hobby, you only spend it. 

Stocks are have a very high internal correlation than any other asset class. For eg the correlation between Tata Motors and HDFC Bank will be much higher than steel and crude oil. So I personally think obsessing with stock picking is overrated. If you pick the right sector and get the direction of the stock market broadly, your job is done. Even if you get the market direction right and buy good stocks, you are done.  

However here are some guidelines from Security Analysis by Graham and Dodd.

There are three aspects to consider while constructing your stock portfolio
1. The value of a stock depends on what it can earn on the future.
2. Good common stocks are those which have shown a rising trend of earnings. 
2. Good stocks will prove sound and profitable investments. 

Now lets do a very simple exercise. We will see the returns of Nifty of the past 5 years. And then i randomly picked some stocks to represent each sector.

So we see above that nifty has given annual return of 10.4% for the last five years. Now recount all the events that the market has seen to get here. 

1. Coal Scam and other UPA Scams 
2. Modi elected in 2014 
3. Three years of Raghuram Rajan
4. Taper Tantrum in the US
5. Ben Bernanke leaving and Yellen taking over
6. Start of rate hikes in the US
7. Greece crisis and talk of Grexit
8. Oil price collapse by 75%
9. Brexit
10. Trump election

I picked Sun Pharma, Infy, HDFC Bank, Hindalco L&T and Zee to represent Pharma, IT, Banking, Materials, Industrials and Media. 

The return that this portfolio made is 16.5% which was a big surprise to me also. Inspite of having laggards like Infy, Hindalco and L&T  the portfolio has done quite well. This is not a recommendation but just an example. A real portfolio should have atleast 10 stocks but not more than 15. Over 15 there is diminishing return from adding more stocks.

The important thing is not in the stocks picked but holding them through the events that we have witnessed. Temperament trumps intelligence any day in the investment business. 

Buy and hold doesnt mean never sell. Even Warren Buffett evaluates his portfolio and sells losers or books profits in stocks he believes are over valued. But thats the tough part that most people dont focus on - When to sell ?

Regards

Anish

QED Capital  

Important Disclaimer: Please do not treat anything on my blog as investment advice. I do not provide any recommendations of any stocks or securities. Any stock mentioned may be merely by way of an example