We are open now, pls come in


Hi all,

We are absolutely delighted to let you all know that finally we are open for paid subscription.

We took lot of time to get SEBI approval as well as to get our bank account ready to accept payments.

Please access the payment page clicking on the ‘Subscribe’ button anywhere in the site (www.ride2rich.com )and chose your plan. 

Once you make the payment, within a short while you will get a ‘Welcome to Ride2Rich’ mail that will guide you through the site’s stock recommendation process. For any query you can always reach us through mail (contactus@ride2rich.com) or call us.

We are open with two services  “Make Me rich” and “Show Me The Way” plans.

Hope to start a mutually enriching and prosperous journey with you all.


We are going to our permanent address!


You all will be happy to know that we will soon be moving to our permanent address www.ride2rich.com.

This is still a work in progress website. We will be eager to know your feedback on the same.

Everything remains the same, apart from few value adds, few new services and lot more commitment.  Yes, change is good and it is here.

Thanks for all the support, hope to get the same going forward too.

Inox Wind Result update and my comments

I wont get much into the details of result as this is quite talked about and discussed on in social media with friends.

Here is a snapshot from their result presentation.

inox wind

So, overall in topline and bottomline there is phenomenal growth and on this account company has  over delivered on their guidance. Though EBIDTA margin has fallen a bit.

However with the result market got quite spooked and the stock tanked fast with very high volumes. So, what did unnerve the investors? Look at the image below


Short term borrowing and trade receivables has gone up drastically. Which will mean there will be pressure on working capital and will affect the free cash flow of the company. This is a no doubt a concerning sign as this goes completely against company guidance.

Management came up in defense with the following points.

  1. On debt issue: Debt to equity ratio has gone down from 0.5 levels to 0.32 levsls, which is a good sign.
  2. On short term Debt issue: We have sold about Rs 1,850 crore of goods in the last quarter. Now a lot of these goods when you purchased the components for these, these are all Letter of Credit (LC) backed. A lot of these have credit periods ranging from three months to six months. So, when you look at the short term debt all of these LC backed creditors are coming in the short term debt.” 
  3. On trade receivable issue: Management says actually trade receivable days have gone down from about 177 days to about 147 days and they want to bring it down to 100-110 days in next few quarters.
  4. On free cash flow issues: Management says, any company that is growing in such phenomenal speed cannot have free cash flow, however he expects the growth would slow down due to larger base now and it would come to 20-30% and then they will have substantial free cash flow coming in.

My take on the issue:

Management was quick to come up with defense on every point and the good point is their defense look logical and transparent. However, i hate the fact that the company is time and again negatively surprising the market and investors. Last quarter they did the same thing with lesser topline and management said that they could not deliver in time due to manufacturing bottle neck. Now this time we have host of new issues coming and hitting us on the face.

The difficulty in taking a call is, when a company is growing and winning order in such a speed, some issues here and there are bound to happen, so i believe in this case we would give a benefit of doubt to the company and hold on for another quarter. However we will keep close watch on it and sell out quickly at a hint of any problem. If the same issues or new issues crop up next quarter too, we will take no time to sell out.

So, hold advised, no new investment advised.

Link to management interaction: http://www.moneycontrol.com/news/results-boardroom/plan-to-bring-down-average-collection-days-to-110-inox_6563241.html 

Link to investor presentation: http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/C57BD75F_3CCA_4251_B67E_9ECE8E6747FD_165458.pdf 

How to hunt value and discounts in market!

1389972846BIG Sale Super Discounts 1043x385.jpg

I find it ironic that more research is being done today than at any point in time in the past, yet a lot of value investors are failing to beat the market.

Ironically, the mountain of articles on popular investing websites just aren’t helping. Part of the problem might be due to the “more brains” problem Graham cited years ago. Since everybody on Dalal Street is so smart, all those brains ultimately cancel each other out.

This glut of brain power, investment research, and investors clamouring for bargains does not mean that you can’t beat the market. But, knowing how to pick value stocks is a key requirement, along with having a good strategy and being prepared to do things that most other investors aren’t.

Where You Should Hunt When Picking Value Stocks

One core piece of the puzzle is leveraging your biggest competitive advantage as a small investor: your size. Let me explain…

Professional money managers manage billions each year. Legal regulations make owning more than 10% of a single company, or having a single company make up more than 5% of assets, a real burden for a fund company. Given that managers want to keep positions below 5% of their fund, the pool of investment candidates open to money managers is tiny. These restrictions essentially limit a manager’s universe of stocks to comparatively larger cap stocks.

With that much money sloshing around the markets, medium, and large cap companies are, understandably, extremely picked-over. This suggests a powerful advantage that small investors can leverage: investing where the professionals cannot invest.

That really comes down to investing in small cap and micro cap companies. It’s in this universe, among the thousands of tiny publicly traded companies available, that a small investor can pick the most promising value stocks, which will become big enough to attract the big investors later on.

What Value Stocks to Concentrate On

15 years of experience in investing has taught me a few very valuable lessons.

The first is that, despite your research, you’re probably not as important to the end result as you’d like to think you are. Sure, you can conduct an analysis and your stock can go up just as you predicted, but it may not have advanced for the reasons you thought. Sometimes the stocks that you assume that will workout well… don’t. And, at other times, the stocks you thought were real dogs will advance in price.

Another core insight I’ve had over the previous decade is that I (and likely you, as well) am not Warren Buffett. Small investors can’t bring the same amount of skill and experience to investing as he does, and blindly following how he invests today is what I call falling into the Warren Buffett trap.

Luckily, a small investor doesn’t have to have Buffett’s investing prowess to know how to pick value stocks and succeed as an investor. Investing is a probabilistic exercise, and I’ve found leveraging a statistical investment strategy (ie. “Mechanical” investing style), extremely rewarding. Leveraging them means being able to earn the same investment returns that drew you to value investing in the first place… without you having to be an investing guru.

By simply buying a basket of stocks that are undervalued relative to some value metric, you can leverage those statistical returns to propel your portfolio to large profits.

Different value picking strategies :

The sorts of strategies that I’m talking about fall into the “classic value investing” or “deep value investing” categories. These are the value strategies that Benjamin Graham talked about years ago when he taught his students how to pick value stocks. These strategies have been extensively tested, and used successfully in practice for decades.

Low PE – One of these strategies is the classic Low Price to Earnings strategy. This strategy has been employed successfully by contrarian managers such as David Dreman, whose funds returned 16-17% per year over decades. In general, long back testing researches show that in the US market, a Low PE strategy is good for an average annual return of 16%.

Low PB – Low Price to Book value is another classic value metric that yields market beating results. Using the strategy investors should expect to bag a CAGR as high as 14.5%. That’s a fat 45% in excess of the market return over the course of your life. (Again numbers as per research in US market)

Low PC – One of the more recent classic value strategies, and focuses on finding stocks low relative to Cash Flow. This strategy performs a bit better, recording a CAGR of just over 18%.

High Dividend Yield – Mario Levis at the University of Bath conducted a study called, “Stock Market Anomalies: A Reassessment Based on the UK Evidence.” He found that the highest dividend yielding stocks returned 19.3% on average. Not bad for a basket of cheap stocks!

Net Nets – Then there is Ben Graham’s famous net net stock strategy. Essentially a net net stock is a low Price to Book stock but where the “B” in the P/B ratio has been stripped of all long-term assets. That’s about the easiest way to explain the concept. Basically the price has to be lesser than the net current asset value. (NCAV). This strategy almost gave 25% over several decades.

Of course, the catch is that while you can always find enough stocks to fill a portfolio using the first 4 strategies, during bull markets domestic net nets dry up, making it almost impossible to use the strategy.

How to go about it?

The easiest and safest way to go about it is to adopt one strategy given the market condition and select the basket based on that strategy. Different market situations favor different strategies, like in Bull market net nets are hard to get and low PE and PC stocks tend to out perform other strategies. With you experience and understanding you got to adopt a strategy and stick to it. This will give you a large pool of stocks. Then you should use certain parameters like growth, promoter quality, business quality, balance sheet quality, opportunity size etc to bring them down to 10-15 stocks.

I believe value picking is not difficult. What is difficult to generate conviction on ones idea. Happy value picking.




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SSWL comes up with good Q4 and a good Year


As expected, SSWL comes with a great Q4 and a great year. As per our expectations margins are expanding continuously and shows that the company is really working towards making the margins better.

Please find below the Q4 and FY 15-16 results of SSWL…


Sales has remained more or less flat in both quarterly and yearly numbers. However with new plants coming in and new orders flowing in for export, company should do better in this front too.

Company is in a continuous margin expansion mode, every quarter the operating margins are getting better. That is reflected in yearly results too. The process of margin expansion process should continue.

With margin expansions, profits too are going up. Net profit is up by 54% at a quarterly level and 55% in a yearly level.

EPS too has expanded to 39.9 levels compared to 25.8 levels last year. With the new EPS now the PE comes to around 10.5.

Overall, things look good. Those who are holding should hold tight for more gains. Those who are willing to buy can do so around Rs. 350 if the price comes there.

Value Investing Foundation 2: Margin of Safety. Explained.


Margin of safety is the basis of value investing strategy.  The father of value investing, Benjamin Graham proposed in The Intelligent Investor that “to distill the secret of sound investment into three words, we venture the motto, “MARGIN OF SAFETY”  Seth A. Klarman, a disciple Graham and famous value investor himself literally wrote the Margin of Safety book.

What is a margin of safety?

In our value investing foundation article we wrote that value investing is about buying a stock at a sufficient discount to intrinsic value. Buying a stock at a significant discount to its intrinsic value allows the investor to have a “margin of safety.”

To help construct a margin of safety definition, Graham contends, “We have here, by definition, a favourable difference between price on the one hand and indicated or appraised value on the other.  That difference is the margin of safety”  Graham explains that a margin of safety can only certain if reasonable and rational analysis can demonstrate that the price paid for the stock is substantially less the value of the underlying assets.

Warren Buffet describes this succinctly, “Price is what you pay.  Value is what you get.”  The value investor looks to pay a price much less than the value received – and that difference is the margin of safety.  In other words, value investing is about buying a dollar for fifty cents – therein lies the margin of safety.

Very simply, Joel Greenblatt explains in The Big Secret for the Small Investor that the concept of margin of safety is about “leaving a big space between the value of what you are buying and the price you pay.”

Why is a margin of safety important?

In Margin of Safety, Seth Klarman explains “that value investors seek a margin of safety, allowing room for imprecision, bad luck, or analytical error in order to avoid sizable losses over time.  A margin of safety is necessary because valuation is an imprecise art, the future is unpredictable, and investors are human and do make mistakes.” Buying a stock with a significant margin of safety reduces both the likelihood and severity of potential losses.

Value investors don’t just like to avoid losses though – they still like to make money, of course.  Graham wrote, “A strong-minded approach to investment, firmly based on the margin-of-safety principle, can yield handsome rewards.”

How do we get a margin of safety?

“The margin of safety is always dependent on the price paid,” writes Graham.  “It will be large at one price, small at some higher price, nonexistent at some still higher price.”

Klarman says that investors achieve a margin of safety, “By always buying at significant discount to underlying business value and giving preference to tangible assets over intangibles.”  Much of a potential return is earned as the price of the stock begins to reflect the underlying value of the assets.

In order for the gap to narrow, the investor must try to first understand why the discount exists and second, whether there are any catalysts that will help the stock rise to reflect the true underlying value.


Margin of safety is the central theory of value investing.  First and foremost, a margin of safety first helps ensure the goal of preservation of capital and loss mitigation. It is about buying securities at substantial discounts to their actual value and then maintaining these holdings until the mispricing is eliminated by the market (or unless other information becomes available that could change the original investment thesis), thereby earning the value investor satisfactory returns.

So, what we must do

  1. Buy stocks at a certain price and never over that ‘value’ price
  2. Stocks go up and down so, it makes sense to put multiple limit orders down, so that u get maximum advantage of volatility
  3. Buying high conviction stocks all the way down to increase margin of safety
  4. Assign a ‘Value’ for each stock qualitatively and buy only below that





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SSWL bags new order from Europe


Today SSWL informed the exchanges about a new export order of around 25000 high speed trailer steel wheel from European market.

The order is resultant of the newly developed caravan wheels facility with an aim to increase SSWL’s presence in the highly competitive Caravan wheels market’ SSWL is expecting to receive more orders for these wheels in coming few weeks for the European trailer market.

Please read the full press release here.

Original report here.





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Inox Wind Update: Inox winds bag 2 more orders adding upto 170 MW


Inox wind as expected is bagging regular orders.

Recently company informed the exchanges about two more order One is of 70 MW project for Adani Enterpeise. This is quite significant as this makes the entry of Adani Enterprise in the field of wind energy.  Management is hopeful about more projects coming in as Adani has an aggressive plans for this new vertical.

Read the press release here.

Today company also informed the exchanges that they have received order of 100 MW from a leading Renewable energy IPP. Inox Wind to Install 50 MW in Madhya Pradesh and 50 MW in Gujarat. This order consolidates Inox winds leadership in the mentioned states. This is multi year development and maintenance contract.

Read the press release here.

Read the original report here.

Aggressive Multibagger; Speciality Restaurants probably the cheapest branded play!


At the onset I would like to inform all readers that it is a great business that is going through the worst of phases. So, it would take a good amount of time to see best coming out of it. So, only real long term (3-5 years if not more) investors should look into it. It is no way a quick profit call. Also, it would take some guts to pick it up.

Speciality Restaurants Ltd.
The story of a hungry, foolish Bengali…

Incorporated in 1999,Speciality Restaurants Ltd is a fine dining operator in India the only listed company in the space. The first restaurant of the group came to existence in 1992 in Mumbai to cater to Bengali community who used to miss the home food and specially fish. The first restaurant was thus named ‘Only Fish’.  From the company website “It started as a tiny restaurant created by a bunch of foodies for some more foodie friends”

Because at the heart of the group lies the passion of Anjan Chatterjee, and his weakness for good food that turned into a great strength for Speciality Restaurants! He started Only Fish in 1992 with the nostalgic flavours of Calcutta, in the fast lane of Mumbai. The forty by forty square feet crowded dining place drew gourmets and food critics alike with the unique flavors of Calcutta. Anjan Chatterjee realized the dearth of speciality cuisines and hence the journey started.

By 1994, Speciality Restaurants Group had two flagship brands, Oh! Calcutta and Mainland China.

In May 2012 , Speciality Restaurants went public with a successful Initial Public Offer (IPO) in a very challenging economic environment and thus became the first and only public listed company in the stand-alone fine dining restaurant category in the country. The IPO was over subscribed by 2.54 times and got listed at around Rs. 150.

In the last 24 months, Speciality Restaurants has added a slew of casual all-day dining formats like Hoppipola, Mediterranean restaurant Café Mezzuna and a Chinese quick-service eatery Zoodles. Plans are also afoot to open more all-day dining formats where the beverage section (in particular alcohol) would take center stage. One such concept cooking in the oven is a micro-brewery.
Today SRL is the largest restaurant chain in India with 80 Company Owned and Operated Restaurants, 23 Franchisee and 19 Confectionery outlets spread across 23 cities in India, 1 city in Bangladesh and 1 city in Tanzania. Moreover, in this journey they have created a number of envious brands that caters to fine dining to fun dining, which they can leverage on, in future.

Strong brands, stronger spread!

SRL has created great brands across cities of India and a few abroad too that caters to variety of consumer profile ( From families to teen hangouts ) and a variety of taste and authenticity. I am sure all of you have come across few of these in your respective city and for me the experience had been very good in all of their restaurant brands. It ensured good food and good time. Following is a snapshot of brands that they have created till date.

SRL brands.png

Click here to know more about their brands and what kind of food and experience they  offer.

The following image will give you an fair idea about their geographic spread and the number of outlets for each brand


The man behind:

Though I haven’t covered yet, the financial performance of the company is dismal to say the least, and in this kind of situation understanding the management’s ability and grit becomes one of the most important parameter of judgement. So, here we deep dive into the management of SRL.


Anjan Chatterjee with his son Avik Chaterjee

Anjan Chaterjee background:

Born in 1959 into a family of scholars in Kolkata, Mr. Anjan Chatterjee went on to complete his graduation from Calcutta University and studied at the Institute of Hotel Management & Catering Technology, Kolkata, in 1982.

His first job was with the Taj Group of Hotels where he had first hands on exposure in the F&B industry.

Mr. Chatterjee’s passion for gourmet cuisine found its expression in the restaurant, Only Fish, which he launched in 1992.

A avid foodie, who takes part in a lot of food shows across the country. A avid lover of art and culture and is celebrated as an cultured intellectual in Calcutta and Mumbai.

The lesser known facts about Anjan Chatterjee:

Anjan is a brand builder per excellence. Not just his own brands he has build several power brands of India through Situations Advertising  a ad agency operating across different major cities of India that he founded in 1989. Only Fish was founded to cater to the Bengali ad people who used to miss their home food badly.

From Ujala ( Char Boondo wala) to Everest ( Taste mein best, mummy and Everest), to modern day Fair and Handsome ( Chupchup ke ladkiwala cream…) his brand building abilities has helped several home grown entrepreneurs to compete with their MNC counter parts. Click Here to know more about Situations advertising.

So, building and leveraging brand is something that he is mastering for last 30 years or more. It is that one crucial ability that sets him apart.

On November 7, 2015, the company’s board approved the appointment of Avik—who has been working in the company since 2013 without any formal designation—as the head of innovation and new formats.

What Avik is bringing into the business is quite clear from the excerpts of the Forbes Interview “I was always pushing for bars, but my dad was resistant at first. He used to tell me: ‘I’m a restaurateur and I’m going to make restaurants.’ I told him that the world is changing and people are also changing,” says Avik, who likes experimenting with global cuisines and has developed a flair for Japanese food. And thus the bar brand Hoppipola, catering to a young audience, was born in 2013 in the country’s pub capital of Bengaluru. The name Hoppipola, though, was Anjan’s choice and it means ‘jumping into puddles’ in Icelandic.

Read the full Forbes interview here.

So a experienced brand builder along with new blood makes a formidable management team for SRL.

Detailed Financial and fundamental analysis:

It is hard to find good points to mention in the fundamentals apart from a few

  1. Debt free, asset light company sitting on big reserves ( Gives them flexibility for organic and inorganic expansion)
  2. Growing top line despite at a slow pace
  3. Days payable outstanding is significantly higher than days receivable outstanding, signifying low or negative working capital requirement ( A cash business)
  4. Decent cash flow despite profits coming down
  5. Company never skipped dividend after listing and actually the dividends are going up despite profits coming down ( Again a hint of ethical and confident management)

Key issues that the company facing financially:

  1. Discretionary spends saw a sluggish trend for last few years, hence topline growth was modest.
  2. Due to high input materiel cost ( Most of which is imported) operating margin is coming down starting 2011. So, though the company is making good sales it is not boiling down to profits.
  3. As most of the ingredients are imported, it is badly hit by high dollar costs that was visible in last few years
  4. As of last year company had the policy of opening 12 to 14 new restaurants per year, increasing on profits due to the break even burden of newly opened stores. Growth has not been profitable for last few years.
  5. Today company is actually making a operating loss, the savior being the cash reserve that generates ‘other income’ to keep the company profitable.
  6. Return ratios, naturally is moving downwards.

So, to sum up, the big issue of the company is to increase profits. Top line is not that much an issue.

Corrective measures taken by the company:

  • The main money churner of the business is Mainland China brand. They have re branded it to Asia Kitchen which will have 40% foods from other South Eastern nations. It will reduce dependency on Chinese ingredients imports and help in improving margins.  In a analyst con call company has said that they have reduced Chinese ingredient imports from 20-25% levels to sub 10% levels.
  • Closing down of unprofitable outfits. They have recently closed down a Sweet Bengal shop in Mumbai, Malad East. 3 more outfits are under close watch.
  • Opening up more of Alcohol focused outfits that will add upto the bottom line.Moving from dinner lunch formats to fun dining formats ( Hoppipola) which caters to all they long customers. As India is getting younger, company plans to move towards Fun dining from fine dining. They foresee major revenue coming from Fun dining in near future which is significantly lower now.
  • Going slow on the expansion plan. Reducing the target of 12-14 restaurants to only opening the ones they are really confident about
  • Stressing on indigenous ingredients to reduce the cost and adverse effect of Dollar prices
  • Promotions to increase weekday footfall.
  • Launch of Mobifeast to cater to corporate catering and weddings. Where ticket size and margins are significantly higher.
  • Launch of Zoodles outlets in places with captive audience. A strategic shift of opening up stores with captive audience ( Malls, airports) from standalone outfits.

My take on the issue:

As you all know i have been tracking it for long, i have written about it in my Facebook Posts before and after Vijay Kedia entered the stock i got even more interested and started to deep dive into the intricate details of the brand.

My main concern was operating margins and it took me sometime to understand the issue and by that time the stock went up from 80 to current 94.5 levels.

I feel following are 4 key the reasons for SRL not doing good financially.

  1. Managements focus on brand building: Knowing Anajan Chaterjee he is taking his sweet time to build the brands. Building brands needs investments and higher breakeven time. They never compromised on the quality and never increased the prices in last few years.
  2. Aggressive growth targets: They tried to do too many things at a very short span of time. So many brands, so many outlets opened up in last few years. As breakevens take around 8 months for them, all through they had some loss making outfits in their portfolio,  which pulled the OPM down.
  3. External factors: In a analyst concall management mentioned, food inflation plays a havok in their business. So much so that he put 60% onus of gross margin erosion to food inflation and 40% to their wrong product mix. Also, as economy didnt pick up as expected their topline too hasn’t grown as per expectation reducing operating leverage to a great extent.
  4. Lack of focus towards bottom line: With managements romanticism with serving good food and aggressive expansion plan somewhere i feel the focus on bottomline was missing. Which manifested in wrong product mix, high import costs and got magnified with economy not performing and discretionary spends going down.

To my mind, with the bad times management is getting conscious about their falsies and have identified the reasons for this downturn correctly. The measures taken on the direction of recovery is right and it is just a matter of time to get back to their hay days.

The following should bring them back to track

  1. Better monsoon so lowered food inflation
  2. Reduction of imports with Asia Kitchen from Mainland China
  3. Closure of loss making units
  4. Shift from fine dining to fun dining
  5. Economic recovery with high GDP growth

Also, I feel that time has come that management takes a internal mindset shift from brand building to brand leveraging. If u have visited their stores you will see how lavish the spreads are…now here comes my Facebook anecdote of Northwest airlines saving $ 500000 a year just by cutting the lemon in 16 pieces in place of 10. That made me understand that in the large scale food business it is really easy to ramp up the margins by bringing in changes that too minute to be tangible. Now imagine their spread and what all can be reduced. As I said here a shift mindset needed from brand building to leveraging. 

Also with strong brands it is easy to dictate pricing. Any incremental pricing will straightaway add to the bottom line. Company still have significant head room of price increase as they say they provide 5 star food in 33% less price.

Valuations and buy strategy:

Valuations are damn cheap and that is for a reason.

A unique branded play in the stock market, leader in its area, almost negative working capital, great management, great brands, zero debt, 80 cr cash balance and most importantly in worst of time that should not last long, is available at price to book value less that 1.5. In my whole investing career i have never seen a established branded play available so cheap. At current price of 94.60 it is available at a mouthwatering valuations if you believe that things are going to improve from here and to me downside looks very limited.

I would suggest to buy 50% at current price. Q4 results will be muted and the stock might tumble after that. Our effort should be to nibble into it as price keeps going down. It would be great if you get a average price of around 85-90.







Managing ones portfolio; 5 important considerations.


“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”  – Warren Buffett

Much advice is available on how to become a successful investor. Some suggestions are useful while others are less so or even counterproductive. For example, here are a few other quotes from Warren Buffett,

  • ‘The first rule is not to lose. The second rule is not to forget the first rule.’
  • ‘Risk comes from not knowing what you’re doing.’
  • ‘Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.’
  • ‘For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.’
  • ‘Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.’

The world of investing can be cold, hard, and unforgiving. But if you do thorough research, avoid cognitive biases, and follow some straightforward but effective guidelines, you can improve your chances of long-term success. Our purpose is to provide several key elements that can help you develop a successful portfolio strategy and therefore avoid some pitfalls in investing.

What is Portfolio Strategy?

Simply put, portfolio strategy is a roadmap by which investors can use their assets to achieve their financial goals. Portfolio theory refers to the design of optimal portfolios and its implication for asset pricing.

Starting with the work of Markowitz (1952, 1959) and his mean-variance framework based on expected utility theory, portfolio theory has undergone rapid development. The evolution of capturing the risk-return tradeoff provides the engine for this development. The classic capital asset pricing model (CAPM) of Sharpe (1964) and Lintner (1965) predicts that an asset’s risk premium will be proportional to its beta, which is measure of return sensitivity to the aggregate market portfolio return. Subsequent evidence against the CAPM points to the fact other factors market-portfolio proxy must be considered in explaining aggregate risk.

Investment Guidelines:  The Investment Policy Statement 

Each person’s financial circumstances are unique. Professionals working with private wealth clients often construct an investment policy statement (IPS) to better understand their clients’ goals. An IPS specifies the client’s risk and return objectives along with relevant constraints. Liquidity needs and taxation are especially important constraint considerations. The portfolio asset allocation is a function of the IPS. Retirement planning and estate planning are also part of the process.

1)    How Much Risk Can An Investor Tolerate?

Investor goals should consider both return objectives and risk tolerance. A basic finance tenet is that a tradeoff exists between risk and return, which is fundamental for investment choices. That is, an investor who requires a higher return can expect to incur greater risk.

Traditional finance theory assumes the most investors are risk averse. Investor psychology is also important to consider in the context of assessing risk tolerance. Kahneman and Tversky’s (1973, 1979) develop prospect theory, which is a theory of decision making under conditions of risk. This theory, which is the most widely used alternative to the expected utility theory, find inconsistencies in investor choices when faced with potential gains versus potential losses.

That is, people value gains and losses differently and, as such, base decisions on perceived gains rather than perceived losses. Investors typically are not only more concerned about losses than about gains but also are risk averse over gains and risk seeking over losses. Assessing risk tolerance is essential in advising clients about portfolio options. An investors’ risk aversion or its inverse – risk tolerance – is a key factor in determining the optimal portfolio selection.

2)    Establishing the Appropriate Asset Allocation

For traditional portfolios such as those consisting of stocks and bonds, the choice of asset classes is a critical element differentiating portfolio performance. Inappropriate asset allocation decisions can detract from longer-term performance. Asset allocation strategies can occur strategically and/or tactically. Strategic asset allocation takes a longer-term approach to capital market expectations, while tactical asset allocation has the potential to add value by seeking out shorter-term opportunities. In addition to asset allocation, actively managing a portfolio involves two other activities: asset selection (selecting specific assets to match the allocation target), and market timing (deciding when and how much to invest). More recent research indicates that asset selection may be as important as asset allocation with market timing a distant third.

3)    Portfolio Rebalance:  A Cost/Benefit Analysis

Portfolios require rebalancing periodically to restore asset allocations based on the IPS and to make changes based on client circumstances. Managers must consider the tradeoff between transaction and monitoring costs and the costs of not being at the optimal allocation (tracking error). Managers should try to achieve “best execution” of trades for the clients. Decision on setting parameters for rebalancing portfolios should consider the possibility for asset classes to exhibit best results. A good portfolio rebalancing activity can significantly add to the returns while not changing the portfolio construct drastically.

4)    Portfolio Performance Measurement

Assessing portfolio performance requires selecting an appropriate benchmark. Benchmarking is a reference that reflects a comparable style to that of the portfolio to be followed by the manager. As a tool for measuring relative performance, benchmarking helps to assess the manager’s skills regarding market timing and security selection. Selecting the appropriate benchmark allows for a more accurate measurement of performance.  Establishing a meaningful benchmark is crucial to those involved in selecting and evaluating investment funds and for those studying the risk-return profiles of those funds. These funds are often classified based on a particular investment style. Investment styles are groups of portfolios sharing common characteristics that behave similarly under a variety of conditions. Style can be distinguished on two metrics: portfolio holdings and portfolio returns. A more appropriate analysis of risk occurs when investors or their advisors take investing style into consideration.

In India, Nifty or Sensex return is widely used as a benchmark to understand the portfolio performance.

5)    Market Innovations

Market innovations allow investors to alter asset allocations synthetically or to gain exposures to niche strategies and non-traditional investment options. Risk can be altered by using derivative securities such as futures and options. Investors often fear derivative securities because they do not understood or misuse them. However, derivative securities allow investors to augment or reduce risk to a given asset class or in the overall portfolio. Another innovation is exchange traded funds (ETFs), which are one of the most successful financial innovations since the 1990s. ETFs often provide a more efficient means of obtaining diversified exposure to a wide-variety of asset classes and strategies than mutual funds.

Increasingly, investors are taking an interest in non-traditional investments. These opportunities are often classified as alternative investments and include hedge fund and private equity. Because hedge fund return properties differ from those of traditional asset classes, enhanced portfolio optimization approaches are needed when considering hedge funds in mixed-asset portfolios. Investors can obtain private equity exposure through closed-end limited partnership funds, but such funds typically do not provide much liquidity. Venture capital, which is one type of private equity, provides entrepreneurial businesses with substantial capital in the startup phase.

Portfolio Management:  A Dynamic Process

In this article, I tried to provide a framework by which investors (often through professional managers) can establish a successful portfolio strategy. Developing an investment strategy starts with formulating an IPS. Measuring performance, benchmarking that performance to an appropriate metric, monitoring performance over time, and rebalancing a portfolio as needed are essential elements in keeping portfolios appropriate based on the dynamic nature of the markets and ever-changing investors’ needs. Market innovations offer new and exciting opportunities to achieve goals and enhance risk-adjusted performance over time. Finally, you don’t need to be a genius to have a successful investment strategy.

As Warren Buffet said, “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.”

Happy Investing.



Courtesy: Tradingmarkets