Disclaimer: This blog shows a mock stock portfolio and charts for education or showcase for potential employer only, not for investment advice. The portfolio and charts are based on the blogger’s personal research and reflect the real past returns of the portfolio. However, the portfolio and charts may not suit your financial goals or risk appetite, and past performance is not indicative of future results. You should research and consult a qualified investment adviser before investing. The blogger is not responsible for any losses or damages from relying on the portfolio and charts. The blogger has no affiliation or endorsement with any company, organization, or entity on the blog. The portfolio and charts may change without notice, and the blogger can modify, delete, or update them anytime.
Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
Let's start.....
In the month of March 2023, I had some exams coming up and in the free time i thought of utilizing it. My exam was related to Economics, and I had done my master's in it too, so i thought of making a sample paper stock market portfolio. I am a regular reader of newspapers, so i knew which sectors and industries are expected to grow, so put that in action and created a sample portfolio with extremely basic research and chose stocks based on the industry in which they operate, expected growth of that industry, fundamentals of that firm and their fair value. This is the current snapshot of the result:
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| Snapshot date: November 8, 2023 |
And here's company wise total returns in 8 months. I'm hiding name of the companies otherwise it would become a stock recommendation which, according to the guidelines of Securities and Exchange Board of India (SEBI), I'm not allowed to do:
Did i predicted such high returns? No
Did i predicted that these companies will perform this well? Somewhat Yes.
What i did was just selected industries which are in line with government policies. This a shortcut to choose a good industry and in that industry, but if you have to choose a particular firm then you need to do a comprehensive analysis.
Is this method of going in sync with government policies always work? No. It sometimes gives a good direction but you need to check various factors like, how much capex is expected to go to that sector? what is the time lag for that scheme to materialize? What is the market structure in that sector? What is the supply demand dynamics? Is there any regulatory restrictions on firms to make expansion decision or to enter that industry (Licensing requirements)? etc., So it is necessary to do a complete analysis on sector and schemes as well.
Here's the Initial and the final sectoral composition of my demo portfolio along with the Invesment data:
and below is the contribution of each sector in returns:
Now Let's analyze it a bit:
1. Why is Energy sector consisting of this high proportion in my portfolio?
If you look closely then you'll find there are total 3 sectors I was bullish on namely: Energy, Logistics and Engineering. In short, Infrastructure sector. India is in making and Indian government is working heavily on PM Gati Shakti mission. Whether you read today's news or 1 year back, you'll find mention of how highly infrastructure developments are going in India and these three sectors along with others not included in my portfolio like, cement, Industrials, utilities etc., are also expected to rise and fundamentally strong firms in those sectors are going to benefit heavily from this rally. As i said, I had my exams so i didn't covered all of the industries in Infra domain due to time constraint but since I was, and currently, am heavily bullish on Energy sector with increase in infrastructural activities, new advancements in technology, renewable energy goals of counties like net zero target and less dependance on fossils, EV adoption etc., are suggesting that for next around 20 - 50 years, Energy sector is going to provide exceptionally high returns and you just need to select the firms which are surfing these waves right.
2. If we exclude above these 3 sectors then next biggest one is Financial services. Why I was bullish on this sector?
It may sound like an absurd to them, but real reason is, "Banks are failing worldwide" and with falling banks and NBFCs create a leftover market. These customers will shift to other banking institutions or NBFCs. At that time there was a huge turmoil like falling of Credit Suisse and SVB and other banking institutions but i was a bit unsure about their impact on Indian Banks. Indian Government and Reserve bank of India assured that Indian banks are insulated, and they also written off huge debt of the banks to increase their overall credit disbursal but i was unsure about how it'll impact performances of different banks as every bank and their business structure is different. So, i turned towards NBFCs and out of many, I selected two NBFCs with better financial health and market position. That resulted in their 13.04% weight in my portfolio and contribution of 10.58% in overall return of 69.07%.
3. Now let's discuss about Pharma and Health sector. What was the reason of including these two sectors?
Since India is the "Pharmacy of the world" and post-covid there is a higher demand of pharma products worldwide and Government's initiatives like PLI scheme for pharmaceutical industry provided a solid reason to include this sector in the portfolio. Since healthcare and Pharma are highly correlated sectors just like, Energy. logistics and engineering, there is no reason to not include health in my portfolio. I could ignore healthcare sector like i didn't included specialty chemicals sector but there need to be a reasonable degree of correlation to drive my portfolio otherwise it'll be heavily infrastructure driven. I wanted my portfolio to be infra driven but not too heavily otherwise it'll invite some unintended market risks. Including specialty chemicals too would also by same reasoning provide two different forces driving it hence I excluded it.
4. Now the last sector in the portfolio is FMCG. What was the reason to include it?
FMCG sector contributed in around 7% weightage in overall portfolio and 4.5% contribution in overall returns of around 70%. It was included just for the purpose of Diversification. 😬
Now by all being said, let's go to the life of the portfolio.
This portfolio was created by me on 17th March 2023 for the purpose of checking returns after 6 months.By that time it had provided overall returns of around 62.3% and after that only 9% in two months. Does that means the life of this portfolio is over and it's the time to liquidate it?
Before doing this let's check whether all the stocks in portfolio attained their fair value or not. when I calculated it on the basis of real time data, I found this information:
50% of the existing stocks are Undervalued and rest 50% are overvalued. After analyzing for their long term growth potential, i found this:
Around 50% of them ( 6/12) have high growth potential rest falls in moderate (10% - 50%), low (<10%) and negative growth potential. Does that infer that all undervalued stocks have high growth potential and vice versa? No. Check it out:
you can easily see that it is not neccessary that undervalued stocks always have high potential and Overvalued stocks have low potential. Hence we can't say any firm's future potential based on its current price or current valuation.
That's the reason why i use Top to Bottom approach while selecting a company. What's this approach?
In this approach instead of looking for a particular company and analyzing it's financial health, we select an industry first and then check for firms with good financial health in it.
How much risk is associated with this portfolio?
If i have to reply in one word then it'll be, "High". Why? Let's first look at the category wise composition:
As you can see that the portfolio is made up around wholly of Small and mid cap stocks with the composition of Midcap marginally higher than small cap and around 6% of large cap (consisting of only one firm in financial sector). Since small and mid cap stocks are known for their volatility and constituting of higher risk, then you can assume this portfolio of being higher side of risk-o-meter. With risks comes Rewards and here's the category return contribution:
From this you can see that Mid and small cap also have higher contribution in overall returns, 43% each of the overall returns provided, indicating fruitful risk, but it's not always the case that small / Mid cap stocks always provide higher returns. You need to select companies based on their "Financial health" instead of market cap. Where to find financial health? This is something you can't find anywhere on the internet. You either have to analyze it yourself (not recommended) or consult a professional financial/ Investment advisor for this. Also, there many market research organizations who provide detailed analysis of different company's financial health in their stock reports. You can rely on those in that matter as it provides various information that you may or may not find when doing your private research on that firm or industry. But again, before making a real Investment it is always advisable to consult a professional.
Issues with this portfolio:
1. Fair value is calculated in the basis of financial ratios and these ratios fluctuate a lot. Firm's PE ratio, EPS, its PB ratio, sectoral PE, and other ratios fluctuate a lot making it harder to converge on a fixed number. Also, it doesn't tells anything about firm's growth potential, like you saw previously, to know a firm's growth potential you need to do a comprehensive analysis of its market and its internal structure (managerial as well as financial).
2. This portfolio have a high concentration risk, i.e. it is highly concentrated to specific highly correlated sectors making it more vulnerable towards sector specific risks.
3. This is also not well diversified enough. This portfolio has only 12 stocks with the composition mentioned above. It is highly concentrated within few sectors with few stocks.
4. This portfolio was not formed based on long term market perspective in mind. it was just formed based on current market conditions at that time not for long term market. For that I've built another portfolio by keeping broader and long-term market in mind. You can check that portfolio here.
5. Risks here are just mentioned but not quantified. We don't know the exact amount of risk that we are dealing with in this portfolio.
6. It is not managed periodically. I've built a Equi-weighted portfolio in the past and leave it as it is. I didn't manage its overall composition as it varied overtime. In real world, when you're making such a portfolio or follow this strategy then you have an obligation to periodically manage it according to changes in your portfolio as per market fluctuations.
Let's sum up. This is all for the portfolio I made in March 2023. Initially this was made to analyze returns in next 6 months after that. Since it is a random portfolio so i didn't find any relevant benchmark to analyze its performance so i selected some best performing mutual funds in this category in Indian market.
According to rules, for a mutual fund to be small cap, there is a requirement that atleast 65% of the companies in the fund have to be from small cap category and for it to be mid cap, 65% companies to be mid cap which is not the case in my portfolio. For it to be multi cap, 25% should be in each small mid and large cap companies with rest 25% in any other asset, which is also not the case. This is more of a PMS portfolio nature. Data of periodic price movement of these PMS isn't available on google finance, that's why i could't compare the exact difference between returns.
pmsbazaar.com provided the overall returns of some best performing PMS available in the Indian market and if I compare my 8 months old portfolio's returns to top performing PMS's 1-year annual returns then it would be third in list which soon can get placed as number 2.
Please check:
On Google finance, I can only compare this portfolio with Top performing mutual funds in the markets and here's the results:
Overall, it would be completely useless exercise to compare it with totally different asset category composition and huge differences like, min 65% in small cap stocks in case of small cap mutual funds and 47% small 46% mid cap mix in my portfolio as well as well diversified and less risky vs less diversified and highly risky and crafted with short term vs long term perspective, still it provides something to compare with instead of nothing. Also, Google finance don't provide dividend data so if some company had provided dividend in past 8 months, then it would provide a downward spike with adjustment adding a little difference in overall actual returns.
Conclusion, In this whole post I talked about the portfolio, its sector wise composition, its category wise composition, the reason behind including a particular sector and why i excluded some other sectors as well. In this whole post i didn't mentioned even a single company name because according to guidelines of Securities and Exchange Board of India, an Individual without the required certificate cannot work or act as an Investment Advisor. I don't possess that certificate that's why i can't acts as an investment advisor for you and suggest particular company's name that's why i presented this blog without naming any.
These portfolios are made in the past, I also recently made some portfolios comprising of Indian Equities and another of Global equities (China, Japan and South Korea). Check them at:
Thanks for reading. 🙏
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