A stable value portfolio is a bunch of high-quality stocks with a diversified portfolio that gives sustainable returns over a period of time.
The portfolio gives a huge margin of safety at the time of buying and growth at a reasonable valuation which will create a stable value portfolio that gives absolute returns.
To create a stable value portfolio there would be a maximum of 25-30 companies in the basket. There are many things to keep in mind before investing in any company.
One should have detailed research on an individual company like understanding the business model, the moat of the business, management quality, and corporate governance as well as channel check on a continuous basis to understand the growth prospects of a company.
Balance Sheet Strength:
Then comes analyzing a Balance sheet, Profit and loss, Ratio analysis, and majorly cash flow analysis. The next part is the valuation and future forecasting of the company.Review Your Portfolio:
The last step is periodically reviewing the company as well as keeping your model updated on a quarterly basis.
There are a few major factors that help to create a stable portfolio, such as buying a business with a balance sheet that does not have debt, sufficient cash on the balance sheet, reward through a decent dividend pay-out & buyback, and a sustainable business model with the ability to fund current and future plans through internal cash flows.
One should avoid capital misallocation that happened in the past, huge debt on books, long working capital cycles, and high pledges.
Investors can look at better opportunities to buy attractive companies to add to their portfolio if they have corrected amidst bad times which would include any major factors like macro headwinds, sector-specific problems, or any company-specific problem for that period but are convinced with their sound management.
The macro obstacle could be the U.S. Fed increasing interest rates, rising oil prices, depreciating INR, etc.
Sector Specific Factors:
The sector-specific problems can involve price erosion in US generic pharma, a general slowdown in automobile sales, etc. whereas company-specific issues can include market share loss and margin compression due to inventory loss, etc. which represents an opportunity to buy in a value portfolio because the good company with a good business model has corrected just because of the market correction.
Investors should avoid the mistake of overpaying for any company on the basis that the growth will be sub-optimal as in the given scenario the stock price is likely to correct in the future as there will be resentment with its growth potential.
Margin Of Safety:
Investors should avoid buying at any given price and rather stick to the valuation as that would in turn provide a better margin of safety. Value portfolio protects investors’ capital and corrects less in time of recession or any huge drawdown in the market due to external factors.
Hold For Long Term:
Success in value investing is all about buying companies when they are attractively valued and holding them till growth starts happening and then gradually trimming positions or moving out of them where the valuations are stretched and growth looks consistent or at peak valuation.
Check for Re-rating candidates:
When those who buy the business at a very cheap valuation where growth would look strong and promising, once value stocks are transformed into growth stocks their valuations are re-rated highly and they can potentially turn into multibaggers.
We have to keep in our mind that every stock will not perform at the same pace as the market or indices. Some stocks will outperform the market, some may underperform or maybe inline.
We have to take the opportunity where the stock price is below its intrinsic value and buy till risk-reward is favorable.
It is not necessary to look at the market on a daily basis. We are betting on the jockey and not the horse. We have to avoid the herd mentality.
In value investing, Buying and holding stocks very patiently will give a very handsome return in the future with sound risk management.
(The author is Fund Manager, Fort Capital)
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of Economic Times)
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