TRENDZ PORTFOLIO – Removing The Fundamental Bias

Sort of an Experiment that is Complementary to My Core Portfolio

Hey There! In my previous post- GAME OF STOCKS, I had shared in detail my overall framework of selecting Investments which includes a combination Business & Stock analysis. Do read that to be able to make better sense of what I am sharing in this post.

So, in the Stock Analysis-Technical Analysis section I had shared that I use technical analysis to help me screen stocks for Business Analysis. Over time I have experienced that a lot of stocks that show up on my screen, on which I carry out Business Analysis/ Fundamental Analysis, but have given them a pass due to some Ifs or Buts on the Business/Fundamental side, actually go on to do very well- atleast as a Stock.

Consider a recent example of Poly Medicure. It came up on my screen in early 2020 and on the business side everything looked good. Medical Consumables is value added manufacturing business, because these products are used in human healthcare the products need to be of specific quality & approved from healthcare agencies. Poly Medicure was already catering to the regulated markets of Europe and has good profitability.

But on the flip side there were few Ifs & Buts that I could not ignore. Firstly, the promoters of the company were involved in some land deals with Robert Vadra in early 2010. This was a red flag, but given that it was in the very past and in personal capacity it could be ignored. But then again, the promoters had this partnership firm Vitromed Healthcare, which is exactly into the same business as Poly Medicure and also does manufacturing for Poly Medicure. This was another red flag that promoters were doing the same business in their personal capacity as well; this was a clear conflict and that coupled with the 1st red flag made me uncomfortable about the promoters here. And so I Passed.

Fast forward the stock has moved from ~300 levels at the time I passed, to nearly Rs1000; ie. stock has tripled. What a Miss!

And this is not an isolated event, there have been countless cases when I have given stocks a pass due a variety of reasons around business dynamics or model, industry structure/dynamics and company related issues itself.

I am aware that one cannot expect every company to be all clean & clear and tick every box on your list; which is why I term this as a Fundamental Bias and not that market is wrong.

But I’ll also say that ignoring these Ifs & Buts is not the right way to tackle this bias. And the reason why I say so is that, balancing your threshold of allowing such Ifs & Buts is very difficult.

If you increase your threshold for one stock and that works out well, it becomes a habit to allow such higher threshold for all future investments. And before you’ll know, your threshold would continue to go higher with each future investment.

According to me, there is no middle ground in this threshold of what level of Ifs & Buts are allowed. Either one has a high threshold or a low threshold.

So, in order to address this situation around Fundamental bias wherein, in order to maintain a low threshold of allowing such Ifs & Buts, one loses out on some good opportunities; I thought that there has to be a separate portfolio all together with its own rules & dynamics.

My initial idea was that I’ll have a separate portfolio wherein I’ll allow for such high threshold ie. so called “Sab Chalta Hai” portfolio. But I was also worried that overtime this “Sab Chalta Hai” attitude would have negative implications for the Core Portfolio, because on a subtle level I would become comfortable with a higher threshold of Ifs & Buts. So, I needed a different idea.

In my previous post- GAME OF STOCKS, I had shared this mantra of mine,

In the Game of Stocks-If you go with the trend (Business+Stock), Manage your Risk and Diversify, It just has to Work.

I thought, If I just remove the Business part itself from the trend, then I am free from the Fundamental Bias as the Fundamentals are no more a part the portfolio.

So, If you go with just the Stock Trend, Manage your Risk and Diversify, it still will work.

With this mantra, I created the Trendz Portfolio.

(Note: Above are NSE Symbols & BSE Names for Stocks)

I have always believed that Trend Following with just Stock Analysis works good enough. My framework of combining Business Analysis with Stock Analysis has always been on the premise that Business Analysis will help further refine stock selection and thus would improve overall returns, compared to Trend Following with just Stock Analysis.

This TRENDZ PORTFOLIO would act an experiment over next 3-5 years, to establish with hard data as to whether Business Analysis improve portfolio performance and that too by how much, so as to warrant the efforts required to carry out Business Analysis. Apart from helping me establish the above, one thing I am certain about is that this portfolio complements my Core Portfolio such that it helps me capitalize on opportunities which might get missed due to my Fundamental biases.

So, that’s all for this post. Going ahead, along with my Core Portfolio, I’ll also look to share updates to this Trendz Portfolio. So, stay tuned.

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Disclaimer-

Above content is only intended for educational & knowledge purpose and in no way should be construed as an Investment Advice or Recommendation of any sorts. I am not SEBI Registered.

I had, have or can have vested interest in each and everything I write about. So kindly consider the same while considering any decision based on any of my writings.