Most mutual funds on an average have 40 to 60 stocks in their portfolio, they have to do it because they manage huge amount of money 1000 Cr to 10K cr+ but they have a huge team of research analysts and very qualified and experienced funds managers whose full time job is to track the markets and manage this money.
But for an individual, it is very difficult to track and manage so many stocks, I feel anything more than 20 is very difficult…
Everyone has their unique way to build a portfolio…my strategy has been to diversify and reduce the risk…but be careful not to over diversify and dilute the returns…I try to keep between 10-15 stocks… can go max 20.
I pick the top 2-3 companies with-in each sector (and I am very finicky about valuations 😊)…and have 5-8 sector/industries in the entire portfolio. This gives me enough diversification with different sectors and within each sector as well.
Once you have identified the stocks, don’t put all your investable money at one shot…start buying in smaller quantities and as you start gaining confidence in company’s business, and as and when you get them at attractive valuations…keep accumulating.
This is only my view…I have seen people do well with very concentrated portfolio and some are comfortable with large number of stocks…you have to find your own niche.
Here is a basic check list that I follow to check stocks…
1) Yearly & Qtrly sales, profit & EPS growth – If you don’t grow…you will die or worse get killed
2) Zero or Low debt – Every industry and company will go through some bad time…It is very difficult for a high debt company to survive bad times. Looks for companies with 0 or < 0.5 debt to equity ratio
3) ROE & ROCE – Look for companies with 20%+ return on equity and return on capital employed. Shows better efficiency in generating returns and is a positive indicator of the management capability.
a. PE < industry PE
b. PEG < 1
c. EV/EBITDA <10 (compare industry as well) 5) Promoter holding: >50%…should remain stable and Increase is a big positive.
6) Positive cash flow – profitability numbers can be fudged…its very difficult to fudge cash flows.
7) Balance sheet – look for Stable share capital with increasing reserves.
These are just the basic check and you should look at multiyear trends to get a good understanding of the company’s financial standing.
Pls. use this only to start analysing and learning and read a lot of books to improve your knowledge.
All the Best.
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