The third and final instalment in the series on investing in neglected firms
Now that you have identified the universe of neglected stocks and are ready to screen the stocks for fundamental strength, the only question that remains is how many stocks to own. While no perfect answer exists in specifying the ideal level of diversification, it is worth remembering that the universe of “neglected stocks” is not representative of the broader market since it is a very unique subset of companies. Consequently, it is only fair to expect that diversification is likely to be less effective in these circumstances. Much will depend on the magnitude of the offsetting effect (or what Harry Markowitz refers to as the co-variance matrix) given the mix represented in the aggregate portfolio. The efficacy and robustness of the filtering procedure should also have a significant impact in reducing risk. Given the methods recommended earlier, a portfolio of 15 carefully chosen stocks should prove adequate in trimming market risk without diluting the essence of the approach. Without further ado, let me share the results of my most recent efforts at putting together a bunch of high-performance generic stocks that allow me to sleep well at night!
(This story appears in the 01 November, 2013 issue of Forbes India. To visit our Archives, click here.)