Joined: 29/May/2007
Location: India
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Posts: 518
Topic: Holding Cash Equivalents Posted: 25/Feb/2008 at 2:16pm
Originally posted by Deveshji :
" Snehal jee's explanation of Cash equivalents made a lot of sense and i would request him to explain it to TEDdies."
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Thanks for the nice words. Sorry for picking up the tab a little late as I was travelling.
" Holding Cash Equivalents " is a loose term coined by me as a semi defence strategy to protect oneself in the times of market mayhem and also to selectively go for bargain hunting when the markets are falling.
As a die hard long term investor will know that typically , he has a list of his favourites where he expects superior returns and which one goes on accumulating at prices which one considers reasonable. There is a broad threshold below which it is normally unthinkable for a devotee to expect the price of his favourite to fall .
However, in times of panic, which always comes without warning and sudden and swift, even the prices of one's favourites come falling down to extremely attractive levels. A die hard believer of a story would possibly at such a stage may have the guts to go against the current and buy but typically, at such times, he is fully invested and hardly has additional cash to invest or the one that he has, he has already used and more opportunity is available.
Typically, an investor hardly has 3/5 % cash in his portfolio unless he has been expecting a major correction , in anticipation of which, he has already converted a significant % of his portfolio to cash. The limitation of this approach is that it demands timing the market and that, as all of us know, is extremely difficult for a fundamental analysis guy. So any cashing out in anticipation of a fall also could result in loss of significant upward opportunity.
To partly mitigate the above, what one can do is : Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend , stable stocks which are , although not very liquid nor have sterling growth, do provide significant protection from the downward risks even in a falling market and holdings of an individual ( by virtue of small size as contrasted from the holding of an institution which has to dabble in bigger quantities ) can be absorbed even in a falling market at relatively less damage in percentage terms than the market fall percentage.
By virtue of such stocks, the overall performance of the portfolio will definitely get muted a bit but they provide an opportunity to protect oneself when the market is falling like nine pins. Some of the stocks which may qualify to be in the category of Cash equivalents could be either MNC stocks ( particularly in the field of FMCG/pharma/auto consumable/accessory ) like HUL, Nestle, Glaxo Smithkline, Castrol , MICO or they could be rock solid stories like HDFC or even some small size value companies which one has spotted.
On the day of market upheavals, one can cash out of such quasi cash shares at reasonably less damage compared to market erosion and use such cash to fund bargain basement purchases of one's favourite.
To illustrate, on 22nd January, on the day of the crash and for next 2 consecutive days, I went on selling Ipca pharma shares at hardly any damage to its pre fall price of 700 and converted the procees to fund my purchases of my favourite Kotak bank which had fallen 10 % and went on falling further.
Like any strategy, this strategy also goes with the caveat that in times of extreme upheavals, it may not work. Further, one should be prepared to accept sub normal returns from this part of the portfolio in normal times which would reduce the overall portfolio returns. However, I find it better to hold some of these stocks (about 10 %) and earn lower returns rather than holding cash and earning nil returns or not holding them and miss out on the bargain basement prices.
excellent strategy snehalji, To put an analogy, when wickets start falling and we have a 4 wickets 22 runs kind of situation, its for the good that Rahul Dravid walks in and slows the run rate but gives stability to the side.
If we expect everybody to be a master blaster in our portfolio, then we might end up getting all out!
Just one question: "Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend ..."
" Snehal jee's explanation of Cash equivalents made a lot of sense and i would request him to explain it to TEDdies."
----------------------------------------
Thanks for the nice words. Sorry for picking up the tab a little late as I was travelling.
" Holding Cash Equivalents " is a loose term coined by me as a semi defence strategy to protect oneself in the times of market mayhem and also to selectively go for bargain hunting when the markets are falling.
As a die hard long term investor will know that typically , he has a list of his favourites where he expects superior returns and which one goes on accumulating at prices which one considers reasonable. There is a broad threshold below which it is normally unthinkable for a devotee to expect the price of his favourite to fall .
However, in times of panic, which always comes without warning and sudden and swift, even the prices of one's favourites come falling down to extremely attractive levels. A die hard believer of a story would possibly at such a stage may have the guts to go against the current and buy but typically, at such times, he is fully invested and hardly has additional cash to invest or the one that he has, he has already used and more opportunity is available.
Typically, an investor hardly has 3/5 % cash in his portfolio unless he has been expecting a major correction , in anticipation of which, he has already converted a significant % of his portfolio to cash. The limitation of this approach is that it demands timing the market and that, as all of us know, is extremely difficult for a fundamental analysis guy. So any cashing out in anticipation of a fall also could result in loss of significant upward opportunity.
To partly mitigate the above, what one can do is : Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend , stable stocks which are , although not very liquid nor have sterling growth, do provide significant protection from the downward risks even in a falling market and holdings of an individual ( by virtue of small size as contrasted from the holding of an institution which has to dabble in bigger quantities ) can be absorbed even in a falling market at relatively less damage in percentage terms than the market fall percentage.
By virtue of such stocks, the overall performance of the portfolio will definitely get muted a bit but they provide an opportunity to protect oneself when the market is falling like nine pins. Some of the stocks which may qualify to be in the category of Cash equivalents could be either MNC stocks ( particularly in the field of FMCG/pharma/auto consumable/accessory ) like HUL, Nestle, Glaxo Smithkline, Castrol , MICO or they could be rock solid stories like HDFC or even some small size value companies which one has spotted.
On the day of market upheavals, one can cash out of such quasi cash shares at reasonably less damage compared to market erosion and use such cash to fund bargain basement purchases of one's favourite.
To illustrate, on 22nd January, on the day of the crash and for next 2 consecutive days, I went on selling Ipca pharma shares at hardly any damage to its pre fall price of 700 and converted the procees to fund my purchases of my favourite Kotak bank which had fallen 10 % and went on falling further.
Like any strategy, this strategy also goes with the caveat that in times of extreme upheavals, it may not work. Further, one should be prepared to accept sub normal returns from this part of the portfolio in normal times which would reduce the overall portfolio returns. However, I find it better to hold some of these stocks (about 10 %) and earn lower returns rather than holding cash and earning nil returns or not holding them and miss out on the bargain basement prices.
Well, I have been doing all these while.......but I will tell you one shortfall of this strategy. If you will ever have stocks of the likes of Nestles, glaxos and Castrols of the world, then encashing will be very difficult.....not because you will not get a decent selling price but in all probability, you will not like to sell them. You simply have to go through their financials to know why I am saying so.....
Mohnish Prabai - talks of a similar concept calling it a "place holder" in his book- he buys Berkshire Hathaway and keeps is a safe position till he finds something more valuable/undervalued.
"Investing is simple, but not easy." - Warren Buffet
Joined: 29/May/2007
Location: India
Online Status: Offline
Posts: 518
Posted: 25/Feb/2008 at 5:39pm
Originally posted by Johnybravo :
" Just one question: "Invest may be, 10 % of one's portfolio in high value, high eps, low pe, good dividend ..."
What do you mean by 'high value' here? "
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In this context, "high value " does not mean ranking being high on the paramters of value investment. By high value, what I mean is that there is a lot of real value in the company and the company is also not available cheap in the absolute sense. Typically, these stocks are in 3 digit quotes and not in 2 digits. However, their beauty is consistent earning , dividend distribution, and absence of much speculation in these counters. To that extent, these counters are normally sedate and have high delivery ratios to the total turnover.
Joined: 29/May/2007
Location: India
Online Status: Offline
Posts: 518
Posted: 25/Feb/2008 at 5:45pm
Originally posted by Johnybravo :
" If we expect everybody to be a master blaster in our portfolio, then we might end up getting all out! "
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Yes, very aptly said. I always say that surviving for really long term and that too profitably in this market is as important as the returns one may earn for a brief spell.
Whenever I have to take a tricky decision in the market in terms of avoiding greed and not surrendering to fear, I tell myself that I have completed 33 succesful years in this market and each of my actions must ensure that I can look forward to being in the market for another similar period .( Provided I live that long ).
Joined: 29/May/2007
Location: India
Online Status: Offline
Posts: 518
Posted: 25/Feb/2008 at 5:56pm
Originally posted by Vivek Sukhaniji :
" Well, I have been doing all these while.......but I will tell you one shortfall of this strategy. If you will ever have stocks of the likes of Nestles, glaxos and Castrols of the world, then encashing will be very difficult.....not because you will not get a decent selling price but in all probability, you will not like to sell them. "
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Congratulations Vivekji for successfully implementing the strategy of giving some space to cash equivalents in your portfolio as a part of risk containment and stability achieving objective. Further , they enable one ready opportunity of bargain hunting when everything seems to have been lost in the market.
I understand your contention that one does not like to sell some of these cash equivalents but that is where one has to overcome the love for them, be clinical. One has to put them on auction block on D day when the markets are falling like nine pins, these counters are providing valiant resistence to the downfall and certain other favourite counters are available at significant discounts.
One may find even Mungeri trait in this as it involves selling off the winners of that particular day and embracing the losers of the day. However, if one has done his fundamental homework correct and is reasonably confident of the respective valuations that he assigns to each of them and maintains a sense of balance, he should not be confused with a Mungerilal.
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