I tweeted this yesterday –

The response the tweet received was beyond my expectations. Check out the tweet, a lot of questions people asked, and my responses. Hope they are of some help to you.

Here is a little explanation on each point –

1. High quality + simple businesses only
Here is what I mean by high quality (blue and green boxes are where I stay) –

Apart from good ROCE, profit growth, clean balance sheet, and good cash-generating capacity, I am also looking for a business that sells simple stuff, the nature of which is not likely to change drastically over the next few decades (but who knows!), and which also has a good growth runway ahead. Plus, the management has a good capital allocation track record and scores high on the integrity front. I do not have the heart or the intelligence to invest in ‘potential’ turnarounds or cyclical businesses. I avoid industries that I do not understand much – pharma, banking and finance, commodities – or business houses I do not trust much.

I do not put much weight on market capitalization while choosing stocks (have a mix of large, mid and small caps in my portfolio), except that I avoid penny stocks or those with low capitalization (like less than Rs 500 crore). Again, it’s a matter of personal comfort.

2. Rarely buy, very very very rarely sell
I maintain a watchlist of stocks, which is largely a result of this process –

I buy stocks only when I find opportunities at valuations I am willing to pay. And when I say I buy stocks ‘rarely,’ such opportunities anyways do not come often. So the last time I bought a lot of stocks (mostly from among my existing holdings) was in March-April 2020. And then there has been a long period of inactivity.

As far as selling is concerned, I try to pick stocks that I would not have to sell, even when they become what people call ‘overpriced.’ Till a business continues to stand good on my quality parameters, I continue to hold. Else, when a stock becomes a large part of my portfolio (like more than 20%, I sell a part for rebalancing purpose). Here is my selling checklist anyways –

3. Equal sizing of positions at cost
This is also a result of my need for keeping things very simple. I try to keep a maximum of 15 stocks in my portfolio and so the aim is to have not more than 6-7% of the total portfolio (which is 100% divided by 15 stocks) in each stock at cost (when I am buying a stock). Some stocks can go to 8-10% at cost, but those are rare.

Remember, I am talking about equal sizing at the ‘cost’ level and not the ‘current value’ level. My 6-7% holding at cost may grow to 15-20% and because of that some other holdings may come down to 4-5%, but that is not what I am tracking.

I agree that position sizing – which involves allocating capital as per your conviction with each idea – is a critical component of investing, but that is when you are doing it professionally or are full-time into it. Equal sizing – not worrying about individual positions, but ensuring that each stock idea is worth having in the portfolio – has worked well for me, and so that is what I continue with.

4. <15 stocks + <3 MFs
This is easy, and is again a result of my need to keep things simple. I have gone to 16-17 stocks sometimes, but have mostly kept it under 15. With two human kids and a pet at home, I find it difficult to manage more than 15 more crazy ones in my portfolio.  

As for the mutual funds, again I try to keep the list small. One of the three funds is an ELSS (for tax-saving purpose) and the other two are diversified equity schemes. Mutual funds are around 10% of my equity portfolio, and I use them as a diversification tool (like international stocks, smarter people managing a part of my savings, etc.).

5. No AGMs, no concalls, only annual reports
One, I am lazy enough to attend AGMs and conference calls. Two, I have been there done that for the first eight years of my investment career – while working on a job – and find not much incremental value in these events and activities. Third, for the kind of businesses I want to own, annual reports do a decent enough job. Fourth, I have also set Google Alerts for companies in my portfolio and watchlist and so if there is an important, meaningful news on them, I receive them anyways.

This is not to say that AGMs and conference calls are not important. They may be for you. For me, annual reports are enough.

Wait, What’s My CAGR?
Well, what I just described above has worked really well for me for the past 18+ years. And this has helped me earn enough to pay all my liabilities, quit my job, work on things I love, rarely “work,” spend time with my loved ones without worrying where the next paycheque will come from, have 55388 unread emails in my inbox and still get away with it (though I sincerely apologize to those whose emails I have not answered yet), and freely write this post (with a cheeky headline) without the guilt of anything in it being made-up, because nothing is.

Now, who cares about CAGRs anyways?

Investing, my dear friend, is a very personal and lonely affair. I enjoy this loneliness – solitude – and also the simplicity that allows me to focus on more important things in life. This is ‘my’ way of doing things.

Your way is your way. If you know what you are doing, do it. Without any guilt.

Nobody cares. In a few years, even you won’t.

So, play your part and enjoy till it lasts.

That’s about it from me for today.

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Stay safe.

Until next time,
Vishal

https://www.safalniveshak.com/how-i-invest/