portfolio strategy: stick to a limited number of stocks to build up your long-term wealth: Rakshit Ranjan


Buy some of the specialty chemicals companies because they have an insurmountable competitive advantage over their peers going forward, says founder and portfolio manager Marcellus Investment Managers.

What’s your observation on this debate about small and medium investors and HNIs avoiding instrument vehicles like mutual funds and PMSs and jumping straight to make a fortune in the markets? You’ve been there for a long time and also engage with investors across the country. What are your thoughts?

It is clearly something that is doable. Let me put it like this. There is no problem with investing without using fund managers. In fact, in our books we’ve published – Coffee Can Investing published in 2018 and Unusual Billionaires published a few years before – have also given a DIY framework using historical fundamentals as filter criteria to pick up a set of stocks in your. wallet and then keep them for long periods. It generates healthy returns with very low volatility.

So it has its viability, but the debate is whether the retail investor has the rigor and discipline to execute or not. If so, it is worth continuing. If not, probably give it to some fund managers who might do some concentration work on it. Having said that, I share your view that over the past 10 to 12 years, most managed products have failed to meet investor expectations, which could be the reason for this emerging trend.

In the long term, let’s say a 10-15 to 20 year horizon, when people invest in the markets through cycles, do you think this is a personalized approach for each investor? For some, maybe mutual funds work and for others, riskier products work? What do you think because you’ve done a lot of research into investment cycles and patterns and investor success in the market?

Very simplistically, let me give you an analogy. When we all watch cricket you can watch a Rahul Dravid or a Virat Kohli playing cricket on TV but you can’t say that I watched how they play successfully and so now I can be on the pitch and I can play myself. So it’s not that easy either. It takes a very thorough thought process about what kind of philosophy you want, which is a separate topic, and what kind of actions fit into that philosophy, which is a separate research topic on specific actions. These two areas are therefore distinct and require careful consideration.

Then there are different ways of combining the philosophy and the set of actions within it, which will give the desired risk-return outcome. There is no one way to invest in stocks, make money, or accumulate wealth. There are different ways. What you need to appreciate is how you are performing to begin with and whether, secondly, this approach meets your requirements, which are usually financial goals. Most often, it is the lack of clarity in thinking about what you can do and what you want to achieve your financial goals. This is where the biggest mistakes start to happen. The exciting part about investing is that it is starting to become an investment approach, which is very risky and damaging to portfolios because what is exciting is not what actually generates returns. It is the reverse in fact.

As a result, if a retail investor can stick to a few select companies rather than gaining exposure to 100-200 and sometimes 500 stocks in their overall portfolio, then this is a good place to start because if you are buying into let’s say three, four, five mutual funds and a few PMSs, then automatically you started with a stock portfolio of 250-300 because each mutual fund will average 70-80-90 stocks and each PMS will possibly have be 15-20-30 shares on average. So if you buy a bunch of these products, you start with 250 stocks in your portfolio and 250 stocks aren’t going to give you any decent returns. It will be better if you combine it with the wider market. So, in order to generate disproportionate returns and build wealth over a longer period of time, you need to focus on a relatively small number of stocks, but for that you need to be clear about the philosophy and your abilities to execute it. .

Let’s talk about some of the emerging themes. Import substitution in our country is something everyone is talking about right now. Among these, chemicals, pharmaceutical ingredients, APIs, and intermediates are an area that is specifically talked about, although there is a slight shift in China’s supply chains in favor of India. People are talking about big changes. Have you looked closely in that direction? This industry as a whole is next to nothing in terms of market capitalization. If you keep SRF and PI aside, then are the rest of the sectors available in small market caps?

Yes, we have a few specialty chemical companies in our Little Champs portfolio. We also have a few companies that target industries that may benefit from a very structural demand for pharmaceuticals and chemicals. But the theme we are playing there is not so much that of import substitution. Import substitution could happen and it could be icing on the cake, but the core of our approach is to buy into these companies because they have insurmountable competitive advantages by their peers in the future.

In addition, they supply their products to customers who will consume them structurally day after day in a consistent manner regardless of the external environment. It is also possible that some of our companies benefit from import substitution but this is not the heart of the thesis. Now we come to the question of whether or not this will emerge as a theme; in some cases this will be the case and in others not, because it is not very easy to put in place the capabilities, technology and R&D to manufacture products as might the substitutes in place in other cases. other countries. Replacement players and other countries can be manufacturers, but at the same time, if there is any in-house manufacturing capacity, then the way various things have formed around the geopolitical environment over the past few months and years, this argues in favor of some of the companies that benefit from it.

It is also the season for annual reports and general meetings. The Reliance AGM takes place on July 15th and there is also the AGM. Was there something you read that caught your eye or a comment you observed about one of the companies in your portfolio? If so, could you share a few?

Yes, only two or three annual reports came out of our list of portfolio companies, but the reports that came out in addition to the commentary, we have been hearing for a month or two from the management teams of other companies. The common theme that emerges is a massive opportunity to gain market share in the wake of the Covid crisis, which could actually end up accelerating profit growth for many of these companies over the next three or four years. . Since this event happened relative to the rate of earnings growth, they would have realized it without this event happening. So in this way, it is clearly a larger theme that emerges.

Why is this happening? Again, the common reasons are competition; whether organized or not, they struggle more than these specific businesses which makes them winners and on top of that there is an underlying demand resilience that these businesses, products and services have because ‘they are aimed at high utility products and services. Accelerating market share is therefore a common theme.

On top of that, there is also the opportunity to further strengthen your franchise by actually providing support to your stakeholders; whether they are channel partners, employees or raw material suppliers in times of crisis, which ends up providing a stronger and better long-term combination of fundamentals for such a business. So that I say the most common positive theme comes out.


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Don F. Davis

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