Diversified Portfolio

After reading a ton of information across various websites, I will settle on the following rules for the diversified portfolio (~15-25 stocks) –

1. Asset allocation: 25% Debt/Cash – 75% Stocks

2. Diversify and buy value stocks

3. Sell a bit (1/5th) if stock increases by 25%.

4. Sell completely if stock increases by another 25%.

5. More than 50% profits – sell after one year and reinvest in another MFI stock

6. Buy more if stock falls by 20%/More than 20% loss – sell before one year (depending on the stock)

I will consider a stock that has value if it passes the conditions of Magic formula and Graham principles –

1. Low P/E (High Earnings yield) and High ROIC (assign ranking according to Magic Formula and sort for different market capitalizations (Top 25 results in 50cr, 100 cr, 250 cr, 500 cr, 1000 cr, 5000 cr))

2. Stock’s P/B < 2/3

3. Debt/Equity < 1

4. No losses sustained in the last five years.

Among the stocks that pass all these conditions, I choose the best stocks depending on –

High ROE, Good management, Not a fad/cyclical stock, No banks, fin service companies etc., Not a declining industry/bleak future prospects, No wild fluctuations in EPS for the past 5 years, preferably different sectors, and will disregard if PE < 3 (this is getting more into a comprehensive valuation category, but a high level screening of the stocks selected would be enough for a diversified portfolio).

From Chandrakant Sampath and Shankar, I will blindly buy stocks which are at a 36 month low (if I get too bored, I mean really really bored, then I will buy stocks which are at a 24 month low). Here, I exploit the principle of reversion to mean espoused by Prof Sanjay Bakshi too, but I will reserve that discussion for later.


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