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The working principle behind our “Core” Portfolio

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Value Investing

What is Value Investing

Value investing, by definition is to be able to buy companies cheaper than it’s in perceived fair value or intrinsic value.

Though, one could line up books from the Earth to the Moon stacked together on exactly what “Value Investing” is. I choose to stick to my definition. While, it does sound as simple as it is Value Investing as a strategy has the following problems:

  1. The data and information used to calculate such intrinsic value needs to be actual and accurate.
  2. Liquidity Risk– a value investing strategy works on the premise that the company will eventually will be valued at higher than what it is currently, once more participants and people recognise the bargain.
  3. Going Concern– For a company recognised as a value investing opportunity, it is extremely important that the company is able to consistently perform as it has in the past.
  4. Dependence on Models– The company must continue to perform as the models used to calculate such intrinsic value require it to.

Having outlined what “Value investing” is and the major problems it has, lets move on to our WORKING PRINCIPLE

at The Craving Alpha Core Portfolio

We acknowledge that:

  • Reliable data and information is tough to find- so immense research only increases our probability of a better calculated guess, but never takes away the risk of having bought a “Value TRAP” instead of a “Value Bet”.
  • Timing the market is not only difficult but almost impossible, however irrespective of where the broad market is there are always bargains available.
  • The time it takes for a company to be recognised by the broad market as a bargain, increasing demand of such stocks and hence the market price can very rarely be predicted.
  • The financials and operations of a company are dynamic and may change in the future to a point where the same company at the same price no longer qualifies as a bargain.

Well bought is half sold

Howard S. Marks, CFA

However, most of the issues above can be resolved with optimal and strategic diversification.

We aim to be able to consistently buy such value stocks and while doing so be able to sell any that becomes expensive enough to no longer fit our definition of a value stock. This churn, again does not (usually) depend on the market cycle- though it does have a high reliance on industry cycles.
Understanding that while a certain industry is in boom- making most stocks within the same trade at premiums, there has to simultaneously be a sector which is not in boom and hence not exciting and laden with value investing opportunities.

SIP-like Investing in our portfolio

With optimal diversification between not just stocks but also sectors, we are able to buy stocks in boring sectors at 14-20x (trailing EPS) and sell the same stocks at over 45-50x when the market no longer perceives such sectors are boring.
However, the glitch in this is the time it may take. The same makes our portfolio apt for SIP-like investments where accumulation can keep happening while the stocks trade cheap.

Most of our stock selection happens keeping debt/equity levels in focus and all fundamentals are reviewed as and when new information is available (viz- at-least once a quarter when results are announced). We strongly believe in the ideology

Our favorite holding period is forever

Warren Buffett

Ideally, if stock prices manage to go up inline with their financials- keeping them within our value investing criteria while increasing in both price and value.

Loss Contingency

The system we use to pick and hold stocks, may in the short term not perform since momentum stocks are rarely undervalued and vice-versa. Implying the average holding period required for our portfolio may be longer than originally thought.

Though we put less weightage to broad market movements, any new -ve information would have a blanket effect on all stocks including those in our portfolio.

The probability of permanent monetary loss would arise from companies that are sold lower than the price they were bought at, incase they no longer fit into our value investing criteria.

To Conclude

We believe being able to churn stocks bought at 14/15x PE being sold at 45/50x PE we are able to make roughly 3x investment (assuming the earnings of the company has not grown) over usually the course of 3-4 years (which is the average time of an industry cycle).

While we wait for Mr. Market to come to us wanting to pay such premiums we are entitled to a decent dividend yield, which in recent times is closer to the interest rates received on banks savings account that they ever were.

download the factsheet of our core portfolio here


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