Saturday, July 26, 2008

Now, learn stock portfolio selection from a tall ex-cricketer

During his playing days, former England & Sussex skipper Tony Greig literally towered over his opposition. His medium pace and offspin bowling and aggressive batting earned him the 'best England all-rounder' title till Ian Botham took over his mantle.

But he is best known for his controversial comments - used to intimidate and provoke the opposition. Many may remember his "I'll make them grovel" statement about the West Indies team that really stirred up a hornet's nest.

The comment I remember best is about which players to choose if he was the captain of a World XI. In typical Greig-like fashion he said that he would prefer to have a Geoff Boycott in his team over a Gary Sobers.

Now anyone who knows anything about cricket knows that Gary Sobers is the greatest all-rounder in the history of the game. Boycott is best known for his long, strokeless stints at the crease that frustrated opposition bowlers.

Greig's logic was simple - Sobers could, and often did, win a match single-handed with his flashy stroke play. But he was equally likely to score a zero. Boycott however could be relied upon to grind out scores of 30s and 40s in game after game.

That brings us to the biggest lesson in stock selection. Stock market success is all about staying power over the long haul. So you need stocks in your portfolio that have performed well - but may not be spectacularly - year after year after year, through bull and bear markets. Not only in terms of capital appreciation (often through attractive rights and bonus offers) but also regular income through steady or increasing dividends.

The Boycotts of the stock market are Hind Lever, ITC, Colgate, Reliance, Tata Steel, Tata Motors, Mahindra and Mahindra, Sesa Goa (you get the gist - this list is not meant to be exhaustive). The Rico Autos, Prajay Engineers, IVRCLs, Gujarat NRE Cokes shine for a year or two and then fade away.

Does it mean that your portfolio should only contain 'boring' stalwarts? Not really. But the high-fliers of the day should form only a small part. The formula that works for me is 8 to 10 stalwarts that form 90% of my 'core' stock portfolio. (And the best time to build such a 'core' portfolio is when the stock market is in a bear grip - like now!)

The balance 10% of my portfolio is made up of 6 to 8 mid-caps and small-caps with a potential to hit the big time. I'm mentally prepared to lose all the money allocated to this 10% 'speculative' part of my portfolio. You have to choose the percentage allocation that suits your risk profile. But a word of advice - don't let the 'speculative' part exceed 25% of your portfolio. If it does - and that is likely to happen near a market top - reallocate by booking partial profits.

If you prefer to invest in mutual funds - and most investors should, unless they have the time and interest to pursue the solid amount of research required to maintain a good stock portfolio - then the Boycott's are HDFC Equity, DSPML Equity, HSBC Equity, Magnum Contra, HDFC Prudence, Magnum Tax Gain (once again this list is not meant to be exhaustive). The 'speculative' portfolio can contain the ICICI Pru Infrastructures, Reliance Visions, DSPML T.I.G.E.R.s.

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