Actionable Insights : Money makes money. And the money that makes money makes more money.

How to keep our portfolio healthy & how to make sure it always outperform old version of you?

✍️ Sunday, 19th May'24 : Actionable Insights

👉 Here is an interesting yet most powerful quote of Benjamin Franklin, "Money makes money. And the money that makes money makes more money." What does it means....It means to make big money you need 2 things

👉 #1. You must have descent capital to start with like if you start with stock investment of 2 Lacs you will earn say 40 K returns in 1 years assuming 20% ROI. This 40 K will not even take care of annual expenses of keeping a maid in your house.

But if you start with 1 Cr, you will earn 20 Lac over the same period of time assuming same returns. This 20 Lac will be equivalent to annual salary of a BTech with 3-5 years of experience.

Similarly, if your capital is say 10 Cr, you make 2 Cr over the same period of time and with same returns. This 2 Cr will be equivalent or more than lifetime saving of an average Indian.

What does it shows? - Time (1 Year) & rate of returns (20%) are same in all the 3 cases but outcome differs with big margin only because initial capital is different. Moreover, we do not control both time & returns but we control the principle or capital employed. Hence, you should focus only on bringing more and more capital if you have plan to make it big else life is short & time is limited here and what's use of making big money by the time we reach a stage where we can't enjoy what we made!

👉 #2. Power of Compounding - Everyone knows this but hardly few are able to implement it well. I will talk about this some other day in simple and easy way to implement power of compounding for creating wealth.

✍️ We wanted to cover these two topics today.

1) How to keep our portfolio healthy & how to make sure it always outperform old version of you?

Step#1 - Buy a good quality of stock at reasonable price and have a good capital allocation. Hold every stock for minimum 12 months.

Step#2 - After 12 months, check your portfolio and see the performance of stocks. Stocks which are at the bottom 20%, means non performing stocks you need to exit without any question asked. No attachment with the stock or business or losses. Just go ahead and cut it down, sell it off so that you will be left with best 80% performing stocks.

Step#3 - E.g. If your portfolio is having 50 stocks, you need to exit bottom 10 stocks every year (I do it usually during March month every year for loss harvesting purpose), make this as practice. Never sell your best performing stocks, your goal is to kick out bottom 20% not performing employees (stocks) whom you gave 12 months to perform. Some of the stocks which you exited might bounce back latter on but it's ok, don't bother about them.

Doing this practice will keep your portfolio always healthy.

2) Understand the most efficient & simple concept of capital allocation called "ticket size" (it's our proprietary concept) which we follow.

Step #1 - "Ticket Size" is the amount of capital we need to buy any new stock. Ticket size is also termed as capital allocation while buying any stock.

Step #2 - Most of the investor are confused how much amount they should invest in each stock. Depending on the portfolio size as explained earlier if your portfolio size is 1 crore plus then you are going to invest ~2% of your total portfolio in any single stock.

Step #3 - E.g., If you are investing 2 lakhs to buy a new stock in a portfolio of 1 Cr (remember we are talking about small, micro & sme portfolio) and after 6 month your portfolio becomes 1.2 Cr in that case any new stock which you will be buying should be minimum worth 2.4 lakh which is 2% of the total portfolio size at that point of time.

Step #4 - Doing this will help you to reduce the number of stocks because your portfolio will continue to grows and you will always apply 2% rule and this will keep your ticket size increasing from 2 lakhs to 2.5 lakhs to 3 lakh to 5 lakhs to 10 lakh and at some point of time your ticket size will reach 10 Lacs because by that time your portfolio must have hit 5 crore mark, here too you will continue to hold only 50 stocks or it may reduce from 50 to 30 to 20 and you will be having only the highest performing stock in your portfolio and that is where you see the real power of ticket sizing.

Happy Investing….