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Astute portfolio construction to enhance the Edge gained from Research
Constructing a Bar-Bell Portfolio
The portfolio is constructed using a bar-bell approach with two kinds of stocks:
"Good Stocks" or stocks that offer "High Confidence in Reasonable Returns"
"Emerging Good Stocks" or stocks that offer "Reasonable Confidence in High Returns"
We believe one should never label a company as “high confidence in high return.” This leads to costly errors.
Since many stocks do well each year and we cannot be fully certain whose turn it would be next, we believe we need to hold an adequately populated basket of well selected stocks at all points in time. As we choose these stocks from attractive themes/sectors, eliminate stocks that do not pass our 8 Factor Elimination Investing process, and do the deep dive research work to arrive at a Core Buy List (that cannot be rejected on any factor) from which we select stocks, we believe we have a fair shot at outperforming consistently.
Sell discipline and Avoiding a Lazy Portfolio
We expect to have 7-10 new stocks each year that are then held for 1-3 years, while another 10-15 stocks are likely to be held for very long time. The stocks that will be held for the long term are not identified in advance as such, but if a company and its stock continue to do well and pass our Elimination Investing framework and research process, it may be held for a long period of time.
While our research process is deeply fundamental, and we aim to form a view and invest in stocks over a series of 1–3-year time horizons, we also pay attention to all news-flow, corporate developments and quarterly earnings announcements. We aim to be dispassionate, research oriented, and knowledge based in our holding of companies and in the sell discipline. Should the thesis change, or there not remain enough upside in a stock, or there be better investment opportunities elsewhere, we would look to trim or exit such positions.