An investor’s dilemma is perfectly captured in below lines

To be, or not to be, that is the question Whether ’tis nobler in the mind to suffer, The slings and arrows of outrageous fortune, Or to take arms against a sea of troubles

Shakespeare would have never thought that centuries later lines from Hamlet will truly reflect the state of Indian investors.

Re read [ Interpretation Mine 🙂]

To be, or not to be: that is the question Whether ’tis nobler in the mind to suffer [Notional loss of having missed the biggest bull run in Indian equities in last 5 years], The slings and arrows of outrageous fortune [Envious pain of neighbours making baggers overnight], Or to take arms against a sea of troubles [Jumping and buying companies touching 52-week highs every day and selling winners]

During a bull run (read now) an investor is trapped in various dilemmas, on one hand he is reluctant to buy  businesses making sequential 52-week highs, I did a post on why it is not a very smart idea to overlook stocks hitting 52-week highs, however the bigger dilemma is right under his nose his very own portfolio

Imagine this,

As an investor you were diligent in your SIPs and quaffed wonderful businesses at reasonable valuations during tough days (2008-2009,2011-12) and now you see smart funds are chasing  your stocks bringing multi bagger returns in months

How do you cope with such a steep price rise in your own portfolio ?

Some pointers come from this brilliant blog piece from Dhwanil Desai, and few more from this brilliant discussion on Valuepickr

I will try not to repeat points above, however I would like to propose one approach to overcome this dilemma, my approach could be very simplistic but then simplicity works for me

Some simple questions need to answered before you trim winners, they are

• Is intrinsic value of company  increasing more than my hurdle rate
• What is market implied CAP of the company
• Am I able to sleep with stock’s weight in my portfolio

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I will use an example to demonstrate this, note you can be wrong in your sell decision and could end up having a huge opportunity loss like this, but having no approach to trim your winners in bull market will definitely reduce your overall returns.

REMEMBER NOT EVERY BUSINESS CAN BE HELD FOREVER

Now over to example

Astral polytechnik was an opportunity identified at ~900 (~$145 mn USD) crore market cap in year 2012-13, It was and is one of the perfect company to own due to following reasons

• Sectorial tailwind – shift taking place over a period of time towards CPVC/PVC pipes due to its advantages compared to conventional piping systems and good replacement demand
• Excellent return ratios – A 10 year EPS CAGR of 48% in 2014, add to it 20%+ ROE with negligible debt
• Tie up with world’s best – first licensee of Lubrizol of USA in India and has equity joint venture with Specialty Process LLC of USA to manufacture and market advanced CPVC plumbing system in India
• Strong Management – Strong, capable and ethical management with vigour to do create a name for themselves

 

Circa 2015 – All of the above points for Astral have now been well recognised by markets, it is now a 5000 crore (~$ 900 mn USD ) market cap company, a five bagger in 20 months but more importantly it was now 30% of my portfolio size

So it was time to contemplate

Is intrinsic value of company increasing more than my hurdle rate

Astral is a fast grower expanding sales at 30% and profits at 25% with minimal debt this meant that the intrinsic value of the company (using sustainable growth basis) was growing at a fast clip of 20%, which is more than my hurdle rate of 15% so a tick in a box

Corollary to the above point, it always better to stretch your assumption and see how much CMP is discounting future predicted fair value

you can download this report for 2014 calculations

Here are results for next 2 years

What is market implied CAP of the company

To understand MICAP go through this post and come back, In simple terms MICAP explains how long is market expecting Astral to earn above average returns – The answer is ~ 20 years, that was a cross mark for me in this check list

*Note – Tankrich Tool provides you MICAP instantly

Am I able to sleep with stock’s weight in my portfolio

The answer was clearly ‘No’ , with a 30% portfolio weight it could become single point of failure for my portfolio  if company faced head winds in next few years

In Feb 2015, this was my summary

I trimmed Astral to 15% of portfolio reducing it to half, only time will tell whether  this approach did prove out to be successful or not