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And how are you brothers? Happy New Year to all of you. So let's continue the series we've started of reading Peter Lynch's books. Ok? And watch the full video. In the end, I will sing a small song for you to lift your spirits on New Year 's Eid and those who have not seen the previous video, I request you to watch the previous video as well, you will understand a little and I will also like the meaning.
Do something like, share, subscribe, comment etc. Ok? So let us start. So we have removed the part two fat elephant. Only wiping is left. Ok? of the book. So now we are going to discuss Part Three of the Long Term View, so we are describing Peter Lynch's lecture here. So, I expect your patience, and it will be fun to listen to it carefully.
Here in Part Three, he explains how to design a portfolio, how to maximize gains, minimize risk, when to buy, when to sell, what to do when the market collapses, and what misconceptions there are: why stocks go up or down, options, futures, etc., and what are the advantages and disadvantages of sorting and voting.
All those questions will be covered in Part Three, but for now, we will take up a chapter on portfolio design, which will explain how Peter Lynch describes in his book how he designs a portfolio. So, Peter Lynch says, "Look, it's just like I've written it in running notes. I do n't just show the book, I read my own interpretation, so you'll get an idea of what he's trying to say." He says in the book that I have heard people say that if I get 25 to 30% CAGR return in the stock market then I am satisfied with that, then the back says brother, if you get 25 to 30% CAGR, then if you buy half the country then the entire property will become yours.
Ok? So, this 30% return that is to be expected, even the biggest experts cannot guarantee it and earn it. It will become 30% in a few years. Some year it will become 2%. It could also be minus 20. So this is the truth of the equity game, friend. Ok? And we have to accept this. But then they say that brother, if it will not be 30% then what is the problem in expecting 30%?
We assume that 30% will be made. Why should we think negatively? This would also have happened. He said brother, the problem in this is that if your expectations are too high like 30%, then you will get frustrated with the stocks you have and it is possible that you may exit from them at the wrong time and what will be worse than this is that you take unnecessary risks in pursuit of higher returns in options, futures etc.
So by sticking to a strategy, your gain is maximized in good and bad times, Pital Lynch says, okay brother, so whatever is being discussed here, Pital Lynch is talking about, okay, we are small investors but we have great courage brother, okay, so he is saying that if 25 to 30% is not practical then how much percent, now brother, if you had to make 4, 5, 6% return, you would have bought bonds, you would have made fixed deposits, if you are making so little then there is some flaw in your technique.
Ok ? So now if you see that brother, even after brokerage subscription, magazine small case etc. expenses, if you are earning 10 to 12% then brother why are you thinking so much, just buy mutual fund, that means in long term, someone's CAGR may be up and down for one year but in long term if you are investing for four-five years on your own and it is earning only 10-12% CAGR, then brother just buy mutual fund, why are you worrying, okay, just buy index fund, for that neither you have to do any hard work nor pay any extra money, now you are putting in so much time and money, then when we are choosing the stock by ourselves, then what should be its benefit, so net net, after deducting all the things, what percentage should we get ?
So it is said that it should be at least 15% as per CAGR. Ok ? So if it becomes more then it is a great bonus. So he said, brother, what should I do? So it is said that brother, the one who holds the stock for a long time, he moves ahead. If someone buys and sells repeatedly, then firstly he may lose out on good stock and secondly he has to pay a lot of commission etc.
It is said that now the era of discount brokers has arrived and transaction costs have reduced. But for small investors, the inside and outside game becomes expensive. If you churn the entire portfolio in a year. Suppose if you have a portfolio of Rs 50 lakh and you churn it completely, then about 4% of it goes into commission only, which means to make a net net of 15%, you will have to make 19 to 20% and the more he buys and sells, the more difficult it will be for him to beat the index fund.
So after all this brainstorming, if an investor makes a net net of 15% CAGR for 10 years when the market was making only 10%, then you played the right game Guru, right? Meaning if you started with Rs 10 lakh and made 15% CAGR in 10 years, then that thing becomes Rs 40 lakh and if you start with Rs 10 lakh and are making only 10% CAGR, then within 10 years it will be Rs 25 lakh, so instead of Rs 25 lakh, you would have made Rs 40 lakh.
This is just the principal amount, if you are doing it incrementally on the basis of the initial investment then that is a different matter. Ok? We will see about that too. So he's saying that the second article is How Many Stocks Are Too Many? So brother, how many stocks should we buy and how much is excess?
Then let's talk about how to design a 15% portfolio. I will assume that I will get only 15% after net deduction. So Pitt Lynch is saying that brother, there is no such restriction on you like me that brother, we cannot take more than 5% of our AUM or we cannot take more than 10% of any company or neither you have to manage 9 billion dollars.
Ok? So there are no such restrictions on you, so you can play freely. Ok ? Then he says, brother, how much should I keep? Ok? So let us discuss in this that there are two groups of investment advisors. There is a faction of Jera Doeb. He says, brother, keep all your eggs in one basket and protect that basket well.
And the second group is of Andrew Tobia, which says that brother, we should not keep all our eggs in one basket. There may be a hole in it. Ok? So Peter Lis says, brother, what can I do? Brother, if tomorrow someone points a gun at my waist and says, brother, do you want to keep only one stock or only one, then what will you take?
So we will say that if you buy a company like Dunkin Donut or Walmart, you can understand that it is a strong egg because it will not break relative to the basket and if I buy a company like Sony or Continental Innocents, then I will not buy just one egg, then I will divide the eggs in many baskets, so I will invest in that scheme, okay, so tell me in that way, okay, now we will say that according to me, you should keep only those stocks in your portfolio in which you are number one expert in something, that is, in the thing where you work, in banking or in the power sector or in IT or in health, so wherever you have expertise, you can track that, so look at that or you have discovered some unique opportunity which is meeting all the criteria of our stock research.
Ok? There could be one or there could be dozens. Meaning there could be more than one like this. You may have mastered turnarounds or asset plays while working. Ok? So what he is saying is that now it is not just a scheme to spread money here and there. Okay, right ? There is no benefit in that. Due to this, small investors often die small.
So, in a small portfolio, three to 10 stocks are fine for you. Ok? Now, if you want to invest money once and suppose you are not able to get incremental, then you need a Yusuf Pathan type player, that brother, there are two-three overs left in 2020, you have to score so many runs, either it is do or par and if you are investing incremental money, then the more number of stocks you buy, the more your chances increase that one of them becomes a multibagger, so the fast growth one, which is called a cheetah company, runs like a cheetah, so you cannot tell which fast grower will become your multibagger, so for that, whatever you buy is enough, but what is the scheme in that too that it will not happen by taking it once, where will you invest incremental money, it is performing well, its fundamentals are based on it and not on price movement.
Ok? So he gives the example that Stop & Shop was a company and he is saying that I did not think that it would become such a big company, I mean a multibagger. I thought about 30 to 40% returns. But there was some difference in his story. I bought it after looking at the dividend yield. But the story turned around.
Same thing happened with Marriott as I have stayed in their hotels. But I did not know that brother's interest would increase so much. This means that the business itself will do so well. So, he is saying that the more stocks you have, the more flexibility you have in moving your money around. And if you have very few stocks, then it becomes difficult for you to take a loss or cut it in that way.
So he says that this is an important part of my strategy - flexibility. Some people think that I am only the king of growth stocks. It is said that Peter Lynch is the king of growth. But it is not like that. In my portfolio, only 30 to 40% of the companies are growth stocks. The rest of the other categories of stocks, which we discussed, be it cyclical, asset play, your turnaround, fast grower, slow grower, whatever is the name of your stall, so if it is like that, then I keep 10 to 20% in stall play, 10 to 20% in cyclical, some in turnaround, some asset play.
And like Gid, I am always hungry for value, so if I see the impact of value more in turnaround If it is more in case of fast growth and less in case of fast growth, then I adjust the allocation accordingly. If the deal I take proves effective, I increase the out further. Ok? So now let me tell you that there is an article on diversifying or spreading around, in which he discusses that spreading your money in different categories of stocks is also a way to reduce risk, but in that low grower, if there is low risk, then there is also low gain.
In stock market, if you catch the P below it, then there is low risk and moderate gain. In asset play, there is low risk and high gain, but that asset play is not necessarily metallized. You had seen that even brother Warren Buffett's company was not metallized, he had bought a gold company, then later he had to sell it, so there is a time lapse there.
Ok? So cyclical is a high risk job. Ok? And there is high risk , there is low risk, there are all kinds of things in cyclical depending on where you are from. So now we are looking at cyclicals and we are seeing that the results in the commercial vehicle space have been good. And then how will we track him?
Do you remember what we discussed about cyclicals, that we have to see its inventory. What he needs to do is look at sales growth. Then is there a revival or not? So how did Pital earn this money? Chrysler had seen in the cycle that sales growth is coming back, it is reviving after two-three years, so now you are seeing that our commercial vehicle business remained sluggish for two-three years after Covid, now this commercial vehicle business is doing well, the sales growth that is coming out of it is one time due to GST or you can say there is a systemic shift in consumption because the vehicles have decreased, now along with this the company which does vehicle finance will also benefit, I do not want to take names because we are discussing the book but to put it in context, there is no recommendation from us that now Mahindra & Mahindra Financial Services does this work, like Shri Ram also does it, there is Sundar Sundaram Finance also and I mean that there are some vehicle finance companies, so that vehicle finance business also means its drive will work, so we can think in this way, okay, so now let's come back a little here on the book itself, that They are saying that these are fast growers, that is, you get 10 baggers etc.
either in turn around or you get them in cost grower. Ok? It has meaning in other places but it is available here. Here this is a high risk high gain category. Ok ? If the growth of the grower ends then it will become like 'take it son'. It's happening right now, son, if you haven't given your heart, then that kind of thing will happen.
So, regarding the turnaround as well, if you assume that the disease has caught hold of you again, you understand that the turnaround that was happening, if the disease has caught hold of you again, then understand that, son, when I bought Crystaller, I thought that if everything goes well, I will make 400%, 5x, and if everything goes wrong, then I will lose 100%, one x will go, all my money, so they say that you have to take this much risk, if you are thinking of it as risk, then I made 15x in this because everything went well, okay, so let's talk about this, now we can't weigh the risk and reward on a scale, right?
So, what's the harm in having two stocks in the portfolio, because if the best grower or turnaround swings, then you will be disheartened, so you do n't want to waste all your money, right? So, the thing is that you want to survive in the market, so the main thing here is wise buying. If you buy a stock at a very high PE, then it's like wasting water.
You were trying to moderate the risk, by taking stock you have actually increased that risk, okay, for example, in the 1970s, Bristol Myers was a risky stock, it had 15% growth and a P/E of 30, so it did not make much money, similarly, our Electronic Data System also had a P/E of 500, in 1969, despite 15 years of rapid warming, the stock of $40 became $3, okay, in 1974, it rebounded from there and became $4 again by 1984, that means 0% return in 10 years, we are seeing the same game in TCS also, it was 3200 in 2021 and even today it is 3200, okay, dividend must have been given in between, whatever a little bit was done, but for that you buy some shares, so you are trying that, brother, if nothing happened then you have to see at what place you are taking the stock.
It is better if you sell at low PE or high PE. If you buy at XBIT valuation then there will be problem and we always look at PE in IT. Ok ? So now here comes an important concept, watering the breeds. What we normally do is that we water the thorns and pluck the flowers. So in the next chapter he will tell you when to sell a stock.
But here in this chapter on portfolio basis, he is discussing what kind of selling strategy he had adopted in his portfolio management career. Isn't it ? He will tell you now. So he says I track my stocks constantly. I also look at its price and its story and as the story changes, I also change the fair in the portfolio.
If the story gets better, I expand it further. If the story gets worse, then I slowly cut away. Or if the purpose gets spoiled then I suddenly cut it. But I don't come in cash. I am running a mutual fund for some redemption, so if someone makes a redemption then I keep it for whatever work is required.
The rest I don't come in cash. Because I feel that if I am out of the market then I may have regrets. It grew from that point and it happened. Ok? So he is saying that brother, what you mean in the end is that the structure of your portfolio should also change according to your age, those who are still young can take a little risk, those who play for multibagger and let's say that now you are in the higher stage of age, then accordingly he should take his risk and that person to person will have to evaluate it himself, no one can do it for anyone, so he is saying that brother, I rotate the stocks on fundamental basis, in this way you will not exit the market and will save yourself from the regret of miss time moves.
Ok? So that's what I do. Some people leave flowers in their portfolios and water the thorns. They sell the winner and sit with the loser. So he says that this means that this is a very stupid thing to do. Some people sell the loser and still hold on to the winner. They feel that brother, even they say that it is not very effective.
So you will feel that brother, it must be effective that you have got a winner. Because both these strategies are flops. Because here your decision is based on the price movement of the stock. Not what is above the fundamentals of the stock. So he is saying that price movement is not a true reflection of fundamentals.
At times it is contradictory, isn't it? Occasionally when the price is in the opposite direction, that is where you get the opportunity. But for that, you have to have conviction. You have to do research for it. Price movement shakes the conviction of even the best of people. If you assume that you are holding a stock and it has come down, then you will feel that I am not thinking wrong, the whole world is thinking this, that is why there is no demand in the stock.
If you are understanding that, then the thing that you mean is that at that time, the fundamentals that you track will keep the conviction on it. Okay, so they say that instead of looking at the price, we look at its fundamentals and act accordingly. Okay, so it says that it would be better if you look inside or outside the stock based on its fundamentals and not on the price of the stock.
If the story is good, then stay put. If the story is bad, then cut it. Or even if the story is over, cut it. Okay, so they tell you something, suppose you took stock watt. If it is available for 30 to 40% then you bought Stall Watt for that only, if you are getting 30 to 40% then sell it and go to another Stall Watt where you find both the price and the story right, do not stay in Stall Watt waiting for a multibagger, Stall Watt will not make you a multibagger, now if you make a gain of 30-30% six times then understand that you have made a four bagger.
Similarly, they keep the best grower as long as his earnings are growing. Whatever is there in that, capex etc. is happening. Meaning it is expanding. The company is on a growth path. I was opening five shops yesterday. It is opening seven stores this year. Then he is opening 10 shops. So the meaning is increasing.
And you see that if last year he opened 50 stores and now he is opening 40, then it means his speed is decreasing. So whatever it is, salute the rising sun. Understand the setting sun for what it is, you can even ignore it. So he is saying, brother, he is saying the same thing here, which is very meaningful and he is saying it by underlining it, if you cannot convince yourself that when I am down 25% I am a buyer and benefit forever, the fat thought when I am down 25% I am a seller, then you will never make a decent profit in stocks, now I have said it in English, now what I mean to say is that if suppose it goes down by 25% and you do not buy it and it goes down by 25% and you sell it, it means you will never make money in life because if you had bought a good stock, then it went down by 25%, it had a fundamental impact, then why did you not buy it and why did you sell it?
So if you do it this way, you will not make money. Ok? He is saying. Also, he says one more thing because he says that he never puts Pitlink stop loss etc. or stop orders. I hate it because the market is so volatile that no matter what stock you buy, you have no control over it. So the day you buy and place a stock order, it means the stop order will definitely be executed.
Ok? So you came to know after taking a loss of 10%. As soon as your order is placed, it becomes stock. Ok? So this is the thing, you think you have set a loss limit, but uncle, if you keep taking a loss of 10% in every stock, then how will it happen, right? But today, this is accepted as an absolute truth.
People are believing that no, brother, you will have to put a stop loss, which means everyone has been fed the same thing that you will have to buy the stock. Why will you have to buy the stock, brother? If you look at the fundamentals, then this is the thing. That is why, in the attempt to protect the downside, the upside is missed.
It will go down many times 10%, 20%, and from there, let's say the stock of the company goes down 5x, 10x, then what will you do? You will say, oh friend, it means the work is done. Similarly, Peter says that my strategy is that if I keep it double and say, brother, if it doubles, then I will sell it, then I will not have a single multibagger, nor will I have enough money to write this book, or someone would have got me to write it.
So, mainly the essence of it is that as long as the stock story continues, stay tuned and see how your story will change. Okay, so promises. According to this, I have finished this chapter of the book. Now in the next chapter I will tell you about the best time to buy and sell. But as I promised you guys, to lift your spirits, I will tell you a small two-line compliment.
The one by Ira Fateh Ali Khan, who says that there is a lot of discussion about gold and silver. So, suppose if you buy gold, then this is what happens. Equity as an asset class beats all other asset classes in the long term. So, you have to maintain faith in equity. You cannot abandon equity. Real estate is also often comparable to equity, like if you have bought it in Gurgaon or any other NCR area, but for that, a lot of money needs to be collected and you should be careful that some goon does not come and grab the land.
That is something. But we, as retail investors, we get incremental capital, whether it comes from salary or from anywhere else. Now we are doing it to encourage our capital formation through savings because the last one year has been very bad, so we should not leave the market right now, we should remain in it, okay, so let me recite a small poem that you will have to forget gold and silver, you will have to forget gold and silver.
Come and see the path of equity. Come and see the path of equity. You will start loving the market. You will start loving the market. Try spending a few years in the market. Just spend a few years with me and see. Thank you, please like, share and subscribe brother
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