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Stock Portfolio Allocation How To Learn From Cricket Team To Build A Portfolio Of Stocks

Have you ever seen cricket team batting lineup? Do we take all pinch hitters or all stable players like Rahul Dravid? We do not take neither all pinch hitters nor all stable players like Rahul Dravid. The batting line up contains all kinds of players like fast scoring batsman, stable players who can play for long time on the pitch, players who are good against spin, players who are good against fast bowlers. They all have specific role to play in the batting lineup. Also we ensure that good players are able to play more number of balls so good batsman are sent first and then weak batsman are sent later stages.

Similarly in stock market investing, we allocate in different kind of companies each playing a specific role. Some stocks playing the role of stable compounders, some stocks which have the potential for huge gains and some stocks giving a boost to the overall portfolio by rising quickly over a short timeframe.

Virat Kohli kind of stocks—Time tested companies/Compounding stocks

Stable compounders are strong companies which have long history of constant increase in earnings. These stocks are well discovered and are not cheap in general market conditions except in situations where there is acute panic in the street. These companies due to their strong financials act as good portfolio stabilizers when market goes into panic mode. However their returns are in line with growth in earnings. These companies should only be bought when they are trading at lower valuations compared to the long term averages. One can allocate good percentage of holding into these stocks.

New Dhoni stocks – Upcoming stars

Go back in time to initial days of cricketing career of Dhoni. He failed for 2-3 innings but scored 100 runs in his 3rd or 4th innings. If you can judge that Dhoni is an upcoming star then you have a potential winner in hand. Because these companies do not have long history of success, you will get them at relatively cheaper market capitalizations. So your guts, your past experiences can go a long way in allocating to these kind of stocks. If you have decent allocation then these are the stocks to really make you wealth. I term this as WEALTH CREATING stocks. The trick here is to allocate good percentage but at the same time ensure that if the things does not work out the way you are expecting you can still get out with minimal damage.

Zaheer Khan – Under rated stocks/Contra investing

Sometimes good players are not rated according to their potential. Think of Zaheer khan, he is not as popular as other batsman but he was also an integral part of the team and he deserved the same appreciation as others. But somehow as bowling department is not something general public likes, so some players do not get enough attention. Similarly in stock markets some good companies trade at less valuations than they deserve. The term used for these companies is VALUE INVESTING among the investing community. These stocks generally show up in sectors which are going through some tough conditions and the future looks bleak. Sometimes market thinks that the future is much bleaker than what it actually is. So if the future is not as bad as market expected, soon the market brings them back to their deserving levels.

Sample allocation can be something like this. This may not be perfect but this gives some idea how to play the market.

Company Type

Allocation

Virat Kohli kind of stocks—Time tested companies

50%

New Dhoni stocks – Upcoming stars

30%

Zaheer Khan – Under rated stocks

20%


The idea here is that Virat Kohli kind of stocks need not be sold immediately as they keep growing each year but as said before we need to be very careful at what valuations we are entering into them. Error in judgement in Upcoming stars is very high but on the flip side they can be the real wealth creators. You will find them mostly in smaller sized companies. Underrated stocks comes in all kinds of market capitalization: small, mid and large capitalization.

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