“Patience is a great equaliser of cycles in financial markets. If you have a long term horizon, you will do very well as an investor as long as you are invested in good companies. Multiple mega trends are playing out at the same time and these should provide investors very good compounding returns over the next few decades,” says Gautam Baid, Founder, Stellar Wealth Partners and Author, Joys of Compounding.
Given the volatility in the current global and domestic market, how should one build a portfolio?
After 15 years of investing in the Indian markets and having achieved financial independence, I thought it is time to use my experience and expertise to create an investment vehicle to create generational wealth for many Indian families over the next few decades. Just recently our investment firm in India Stellar Wealth Partners Private Limited got SEBI registered as a research analyst firm and we have recently launched our two small cases on the small case technology platform to help retail investors and working professionals build long-term wealth so that is the broad background about the recent initiative.
How are you going about your portfolio construction? What is the methodology and strategies you are launching here?
Both the small case portfolios contain 25 to 30 names and they are benchmark agnostic with no rigid market cap constraints. The reason for choosing 25 to 30 names is because this is the optimal number of holdings to maximise the risk return trade off. As per our study published in Random Walk Down Wall Street, as the number of stocks in the portfolio approaches 25 to 30 names, the incremental volatility reducing benefits reach near zero and this is the sweet spot for an active investor wanting to outperform the market. One has captured almost all the benefits of diversification and yet the number of companies one needs to know thoroughly is still manageable. That is the broad portfolio construction and one of the two small cases is flexi-cap small case and the other one is mega-trend small case. They are based on our main investment philosophy which is based on variant perception and long-term structural trends. That is the investment framework we follow at Stellar Wealth Partners.
What is the long-term structural trend that you are watching, which you have tried to mimic in your portfolio as well? What are the themes you are betting on?
Long-term structural trends are found in industries with very favourable industry structure. They are structured in the form of monopoly or in oligopoly and they are usually experiencing some form of industry tailwinds. There is consistency and predictability of cash flows in such industries and there is a long runway for growth because of the large addressable market and that is the key for compounding.
When high return on capital employed is juxtaposed …….