Welcome to Sana Securities! Login | Subscribe Now

Sana Securities Blog

Open NavigationOpen Search
Portfolio Advisory, Research and Consulting
  • Home
  • Subscribe
    • Premium Subscription
    • Premium Login
  • Portfolio
    • Portfolio Advisory Service
    • Portfolio Advisory Login
  • Free Sign Up
  • Join Us
  • Contact
You are here: Home / Investment / Long Term Investment Stocks–Making a 5 Stock Portfolio

Long Term Investment Stocks–Making a 5 Stock Portfolio

November 21, 2013 by Rajat Sharma 3 Comments

The story goes somewhat like this:

Warren Buffett was once asked about the best investment advice he would give to a money manager just starting out.

He said, “I’d tell him to do exactly what I did 40-odd years ago, which is to learn about every company in the United States that has publicly traded securities.”

Moderator Adam Smith protested, “But there are 27,000 public companies.”

“Well,” said Buffett, “start with the A’s.”

This without a doubt remains the best investment advice for me and I can safely say for all those who are serious about investing. Though, I agree 100 % with Adam Smith – you aren’t going to get to 27,000 companies. So where do you start? The good news is that in India, there are only about 5,000 listed companies. So I guess . . . . start with the A’s!

The above conversation took place when the world was a really strange place. News did not flow easily and information was not available as freely as it is today. In many ways, internet has changed the way people do things. Courtesy the internet, I am able to reach out to all of you.

The World Wide Web is filled with millions of pages of material on the various investing opportunities. There are many tools to help you research and scan a list of companies based on a range of parameter such as – Industry/sector, size/market capitalisation, location…shareholding…. you name it1.  So looking beyond the ITC’s and Reliance’s of the world is not half as difficult as it was a couple of decades back.

To continue reading more  . . .  Visit Here

To continue from where I left in the article above –

If you are looking for long term investment stocks, once you select a set of companies based on whatever your consideration may be (i.e. market capitalization, CAGR in profit, risk of investment vis-à-vis return etc) – 5 is the maximum number of stocks you should be actively holding at any given time. Sure you can diversify and add more stocks in your portfolio, but I think if you can’t get it right with 5, chances are, you will get a similar result with holding 15, or even more.

Holding 25-30 stocks at one time (the way mutual fund companies operate), could make your returns look very similar to fixed income investments. Personally, if I can get 9% return by investing in fixed income instruments and about 12% return in stocks, I would most likely choose a fixed income product like a bank FD. That is because I look for a much higher rate of return on whatever portion of my money I decide to invest in stocks. If I don’t see the opportunity of making at least 18-20% returns on my stock holdings, I don’t think that the risk-reward justifies an investment in stocks. Sure, the portfolio return may be well below my desired rate of return for a given year, but long term investing is based on the premise that over a period of time, your average return would be far higher.

[I]    SELECTING A SET OF STOCKS

  •  Start your research by zeroing in on the industry / sector in which you want to invest (FMCG, technology, electronics, chemicals etc).
  • Within this sector, select companies on the basis of their size (i.e. market capitalization) and / or past Return on Equity (ROE) record.

You can use one of the many tools to find companies based on industry/sector, market cap and on parameters of profitability and growth ratios etc. You can make a list of stocks for further research based on these parameters.

[II]    MAKING A 5 STOCK PORTFOLIO

2 things should be kept in mind:
First, you must carefully decide the portion of your total savings that you want to allocate to long term investment stocks. I have successfully followed the 100 minus your age rule for my equity allocation, which means that typically, 60-65% of my investible funds are in equities at any given time (I am 33 years old).
long term investment stocks graph

Second, the kind of stocks you select could change the very nature of your portfolio. Look at the three different portfolio sets below:
Image showing three different portfolio sets** I express no opinion on either of the above stocks or the nature of the above investments.

Clearly, based on the amount of money you allocate to stocks coupled with, the kind of stocks you choose could completely change the very nature of stock investing.

The kind of stocks you select should depend upon (i) your expected return; (ii) the risk you are willing to take (with your principal investment) to achieve that return and on (iii) the amount of time for which you can part with your money.

For me, a high quality portfolio of long term investment stocks includes – 2 safe well established companies, 2 upcoming mid-caps and 2-3 small lesser known companies. Besides that, I have no dogmatic investment philosophy something I have written about on other section of my site.

Related Reading – What do you need to be a successful Investor?

Not to say that I have no rules at all. I try to avoid extremely hyped companies – Companies which are already trading at high price earnings multiples, no matter how convincing the future growth story may sound. For example, one midcap stock, I may be interested in is Bharat Electronics at current levels (i.e. @Rs. 1054 a share). I think the company has an extremely interesting story and has clearly fallen below its historical PE averages (for reasons beyond my understanding). Similarly, for my small cap picks – I like companies which have market capitalization of below 300-500 Cr and are a ‘pure play’ meaning that one product or one service is all that they offer. Somehow, the concept of a well diversified small cap company does not work for me.

Last updated: 2nd March, 2015

LOOKING FOR A FINANCIAL ADVISOR? WANT TO OPEN A PMS ACCOUNT? FILL IN YOUR DETAILS BELOW

To Discuss Investment options across Stocks, Mutual Fund and PMS Schemes. Leave your Whatsapp message @ 9833905054 or Email at [email protected]



Filed Under: Investment, Stocks Tagged: guide, Long Term Investment

Back to top ▴

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

  Follow @SanaSecurities

Comments

  1. By vimal on December 20, 2013 at 4:02 pm

    “Well diversified small cap company” classic!! Any examples Rajat? The ones that do not work for you?

    Reply »

  2. By Rajat Sharma on December 23, 2013 at 5:30 am Author

    Thanks Vimal. None of them do actually. Mostly I think to many verticals for a young company either indicates lack of clear vision or that nothing seems to be working. I like pure plays like I said.

    Reply »

  3. By MANJULA KUMARI on February 17, 2017 at 8:39 pm

    I WANT 5 STOCKS PORTFOLIO.IN LONG TERM

    Reply »

Leave a Reply Cancel reply

Your email address will not be published.

Tweets by @SanaSecurities

How expensive are stocks, on a scale of 1 – 10?

PMS 

5 Large Cap Stocks Offering Multibagger Returns

hdfc bank return

Nifty 50 Companies – List & Sector-wise Weightage

 
 SEBI Registered Investment Advisor INA100004608

Copyright 2013 @ SanaSecurities.com T: +91-11-41517061 | +91-11-41517078 |Email