My Initial Hypothesis

My initial hypotheis includes one fundamental idea – I will have two portfolios. One, a diversified portfolio (based on Graham valuation) and the second, a concentrated portfolio (based on comprehensive valuation). Some of the stocks of Graham might (and probably will) flow to the concentrated portfolio.

The idea behind having two portfolios is again a learning from the Masters.

1) Diversified portfolio – Graham, in his infinite wisdom, focused just on the output (numbers). He didn’t care what the company produced, how the management was, where the company was located etc. He just concentrated on the price at which he would like to buy a share. He espoused certain principles via this theme. My diversified portfolio will follow Graham’s theme, in conjunction with the Magic Formula (evangelized¬†by Joel Greenblatt) and which is not too different from what Graham said.

2) Concentrated portfolio – This is an idea which has been a confluence of two masters. Prof Sanjay Bakshi says that Grahamian diversification is fine, if you just want to beat the market by a certain percentage of points. However, to create wealth, one needs to put in serious money behind only a few stocks which might be multi-baggers. Even Buffett espouses the same principle (he says ‘you only need to make about 10 investing decisions throughout your life, and you’d be rich’). Shankar also follows the same principle of having a diversified portfolio and concentrated portfolio.

We’ll come to discussions on concentrated portfolio a little later. Let’s set the stage for the Diversified portfolio in the next post.


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