Portfolio Construction
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Astute portfolio construction to enhance the Edge gained from Research
- Do we have the right level of diversification, and avoidance of over-concentration in positions, pockets and clusters of risks?
- Do we have an all-weather portfolio that we have a high confidence will deliver excess-returns over the cycle and across different market environments?
- Does the portfolio have the right distribution of names across different stages of growth and delivery of returns i.e. some that are delivering well and some that are beginning to get to the stage where these will be delivering well?
- Are we focused on pro-actively minimizing any laziness in the portfolio i.e. are we dispassionately rotating out of names where return expectations are now lower?

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"
- We strive for 40-60% of the portfolio in such companies with approx. 3% to 7% per position.
- Confidence in these stocks is high due to proven track record and good history and quality of management. Market is also aware of these factors, and so our focus is on future growth and the valuations we are willing to pay for these "already discovered" stocks.
- These are higher quality, consistently performing companies with clear strengths (moat), size of opportunity and high visibility in earnings.
- We do not expect these companies to get further re-rated but are happy with their expected growth for the next few years.
- We sell these stocks if valuations become too high or if there are some fundamental changes which make us reconsider the investment case.
- These companies comprise the lower turnover part of the long book.
- Differentiation for these stocks versus peers comes mainly from timing of buy/sell and sizing.
"Emerging Good Stocks" or stocks that offer "Reasonable Confidence in High Returns"
- We normally expect to have between 40-60% of the portfolio in such companies, with average initial weight of 1.5% to 3% per name.
- We expect higher returns from these companies from a combination of earlier discovery (or re-discovery) and re-rating if the company delivers on its potential.
- Some of these stocks are mid-caps and small caps, but they could also be large caps where we see trigger for sustained recovery or re-discovery by market.
- These stocks have potential to offer significant alpha when compared to "Good Stocks" that would typically offer smaller but more consistent alpha i.e. with higher certainty of alpha.
- These stocks comprise the more active part of the long book.
- Differentiation vs. peers for these stocks is via early discovery or timing of buy/sell and sizing.
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.