Introducing a Quality Portfolio
To maximize return, the focus of any investor should be on a single factor, be it Momentum, Value or Quality. But the risk of a single factor is high in the sense that one can go through long periods of under-performance before seeing the light of the day.
Internationally, the accepted norm for advisors is to minimize that risk by having a multi factor approach. More diversified the portfolio is, the smoother the returns will be. For large accounts, advisors recommended exposure to more investments such as Gold or Trend Following to reduce the net volatility of the portfolio.
Of course, nothing is free and the cost of spreading across does mean a slightly lower return but if that comes at the cost of a better sleep, it’s any day better than losing sleep but ultimately getting a high return especially if you are not prepared mentally for the risks.
When we started off with Momentum Portfolio, we made a promise that in addition to Momentum at some point of time we would be providing a Coffee Can style high quality stock portfolio. Today we are delivering on the said promise.
The concept of Coffee Can Strategy goes back to 1984 when Robert Kirby wrote a paper titled The Journal of Portfolio Management. Yet, in India, we owe the familiarity of the strategy to Saurabh Mukherjea when he first wrote the book The Unusual Billionaires in 2016.
Since then, Saurabh has been a strong supporter of the said strategy while laid down very simply asks you to build a portfolio of stocks that carry two characteristics. As he writes in his book and I quote,
Thus, my stock-selection filters are companies that deliver revenue growth of 10 per cent and ROCE of 15 per cent every year for the past ten years.
When I first stumbled upon the strategy thanks to the book, I was impressed because here lay a simple strategy that had in the past delivered a return better than a benchmark but also one that seemed logically sound.
Most Analysts and Fund Managers try to make it seem like their process is ultra complex. From trying to figure out the management quality to understanding the company better than the company’s own management.
It’s not that there is no value in trying to determine how good or bad a management is but it’s easy to get misled for we are finally humans and gullible in nature. The reason guys like Madoff or Ramalinga Raju were able to do what they did for so long has more to do with not their own abilities as sales guys but also the fact that most of us want to look at things from a positive spirit.
Buying good companies and holding them for long is the long and short of the Coffee Can Strategy. In many ways, if you were to read between the lines of any fund manager, this is what the aim ultimately is.
While most retail investors try to chase the next best thing, fund managers continue to bet on what worked in the past in anticipation of them working in the future as well. HDFC Bank was a well known wealth generator in 2010 which at that point of time its 10 year returns were to the tune of 20% at the beginning of that year. Today, its 10 year return stands at 20%.
Yet, most investors will rather chase the next HDFC Bank (the current fancy being IDFC Bank) than buy HDFC Bank. As Charlie Munger says,
Avoiding Stupidity is Easier than Seeking Brilliance
and yet, we seek brilliance by attempting to find the next best stock. Not that it really matters when it comes to final returns for very few will wish to bet on the next best stock a substantial amount of money, but always nice to claim as having identified it – maybe even before the promoters knew about it themselves.
While the basic idea for the portfolio has been borrowed from the Coffee Can strategy laid out by Saurabh, it’s not the same implementation. I have made some slight changes based on my understanding of the strategy as also the portfolio being more diverse than what is generally advertised. As the above Charlie Munger quote says, we are here not to seek Brilliance but avoiding stupidity and a diversified portfolio is a hedge against our stupidity in ways more than one.
Not every stock out there would be a winner but I strongly believe that the portfolio as a whole would give decent long term returns to the investor.
The portfolio has no cap on Individual sector weights though it is nicely spread across with a larger weight in two focus sectors – Tech and Pharma.
We expect very little churn in the portfolio in line with the basic strategy of Coffee Can which is to buy and hold for a decade. Yet, this is not a copy of the Marcellus Portfolio {last time they disclosed the same, these were the constituents}. Do note that there is a slight amount of discretion in the portfolio that can be alluded to us.
For a while, Quality stocks have been richly valued compared to peers. The premium for quality is not going to go out even though we may see a period of flat returns which generally allow for the excess valuations to dissipate.
The risk at the current stage as far as my observation and understanding goes is with respect to flat returns. But most of these companies have showcased excellent growth in the past and the business model is sufficient tuned to continue to grow in the future as well
The portfolio comes at no additional cost to existing or new subscribers. If you have any questions, do mail me or DM me on Twitter
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