Disclaimer: I will post a new stock pick on the Second Monday of every Month. I (and the companies I'm associated with) may have Long/Short positions in the stocks recommended on this blog. Please use the material on this blog as reference only and contact your investment advisor for buying/selling securities. These stocks may not be suitable for your risk profile.
Portfolio Risk Analysis: We use Modern Portfolio Theory to balance portfolios; we prefer adding equities that are either uncorrelated or negatively correlated to maximize returns per unit of risk. This does_not mean that we would select stocks just because of their correlation to a portfolio; once a stock is selected for investment based on thorough bottom-up research, correlation is used to optimize the risk-return graph for different allocations within the selected list of stocks.
Investment Style & Performance:
Here's a link to the historical performance of my equity fund at Marketocracy.com: Performance.
My investment approach is a combination of top-down and bottom-up security selection process. I select sectors and geographies for a equity portfolio by conducting macroeconomic analysis of regions and sectors while maintaining portfolio risk within acceptable limits for investors. Macro analysis plays a prominent role in reducing the total risk (volatility) of the portfolio and maximizing expected returns for a particular level of risk. I also use a few derivative strategies to maximize portfolio returns without adding undue risk to the portfolio.
Once a sector or industry is selected for investment based on macro analysis and portfolio risk requirements, I use a bottom-up security selection process to find companies with sustainable competitive advantages with-in an industry. A quant screen comprising factors such as net profit margin, gross margin, financial leverage, asset turnover, EPS growth, revenue growth, PEG and PE ratio narrows down the list of companies to less than 10 in most instances. At this point, I apply industry specific parameters; every industry has specific measures that can be used to understand the competitive advantages of various companies. This will further narrow down the list to 3-4 companies.
Valuation: Furthermore, a detailed financial statement analysis helps me understand these 3-4 companies and how they are priced relative to peers; finally our time-tested equity valuation model, Scenario analysis, Sensitivity analysis, Comparable analysis and other such methods provide the target price of an equity. These companies are also analyzed for portfolio suitability based on expected returns, systematic risk and total risk of the portfolio.
However, every instance of the above analysis _does_not_ result in a recommendation. Sometimes the equity selected is overpriced and is placed on a watch-list. I follow companies for many years and repeat the above analysis when they get close to my preferred buying price. Most of the companies I recommend have been on my watch for atleast six months. Finally, the portfolio is analyzed regularly to sell equities that have reached their target price and provide a low return for the risk exposure.
For Questions, Comments or to discuss your portfolio: e-mail ketuls@gmail.com.
To receive an e-mail whenever a new stock pick is posted on this blog please enter your e-mail address in the subscribe box next to this message.
