Long term investing: A thought

Long term investors like me have always been confused about

1. How many stocks should be there in the portfolio?
2. What should be the real investment objective? Clarity of goals and objectives!
3. How to diversify? Is there an ideal diversification?
4. When to sell!

I will try to take each point one by one and elaborate on them. My observation and comments are according to my risk acceptance and my investment objectives. Please always be sure of your investment objectives before investing.

• How many stocks should be there in the portfolio? How many marbles can we hold well such that none slips or falls if the wind blows awry? It is as simple as that. One should have only those many stocks in hand, which one can easily keep watch on and monitor the progress. When we buy a stock we buy a part of business and become partial owner. And we must think like an owner then! But of a little different type. Since we generally don't get the majority share we cannot influence the business decisions but if the business is not going well we can make a safe exit and deploy the same capital somewhere else.
• What should be the real investment objective? Clarity of goals and objectives! If you are full time investor and your monthly expenses are from stock market, you may not like my investment methodology. However, many of us would be having a secure stream of regular income and we would be interested in deploying some capital for our future planning. What is an investment objective? Saving and raising fund for a car? Saving funds for our own house? Long term or short term? What I believe is that clarity of investment objectives is must before one should start investing. For my short term investment objectives I keep the money in savings accounts & Fixed Deposits and for my long term objectives I keep them in equity. Not that this is the ideal scenario and has some guarantee but this is what I evaluated as per my risk appetite and long term investment objectives.
• How to diversify? Is there an ideal diversification? Why should we even be thinking about diversification? The answer is simple. If I could find a business that always keeps increasing, I would deploy all my cash in it and will never sell it. But as we all know it is almost impossible to find such a business. Many factors such as input cost, policies and competition. And some business (and management) go up and some come down. But does this mean we should figure out a perfect business and deploy our cash in those companies, which are into such business. This may work out but why stick to only one business when there are aplenty to choose from? Some may shine today and some may shine tomorrow (as I feel alternative energy business will glitter more than gold someday and I am long on Moser Baer & Suzlon). (Suzlon is in fact my contra investment). Equity diversification is good; that's what all sane fund managers do. But remember what happened in 2008. Market tanked and so did all mutual funds and any equity portfolio. Even gold was not glittering then. But the worse part was in such times when your saving took a huge beating, your job was in danger too. Many people lost jobs and savings and everything! What didn't evaporate then was old friend Fixed deposit and other bonds. I laughed when I saw my equity port folio down by 80% and my bond portfolio up and growing at 8 CAGR. Little late in 2008 even gold started glittering but the equity kept silent. So what the lesson has been? There is no ideal diversification, but diversification is must and bonds provide ideal cushion when in need.
• When to sell! This is one of the most difficult aspect of value investing. Finding the right entry point is difficult but taking profit and leaving a stock is much a difficult task. Why? We all are greedy! When a stock goes well beyond our calculated MRP we become greedy and let it go. When stock suddenly tanks as we buy it, we tend to wait to recover the loss. I remember when I entered into L&T a couple of days back, I calculated its top end price close to 1900 INR. L & T rose much faster and well beyond 1900 but the greed took over and I increased my target to 2000. The result is that today the stock is trading below 1800 and I still couldn't sell it.

With all this I conclude my today's post. If time permits I shall elaborate on my stock analysis process.