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Portfolio Allocation...

Dear Readers

Lately I have pondering on whether a diversified portfolio is good or is a focused bet better. The short answer is - it depends.

I started my career in investing at an early age of 14 years. I was in India and was lucky enough to lose money (yes Lucky!) at a very early age. It shook me and since then my quest began. I have seen all the debt bubble, Asian Currency crisis, India's liquidity crisis, Japanese fall etc. The list is endless.

But as the time goes by and the more I read, the more I am getting infatuated with focused bets. It involves hard work, blocking and tackling and patience. It invloves the extreme ability to go against the market and have the guts to stay focused but at the end it pays and pays handsomely. To a lot extent this ability is in the DNA. No business school can teach it. I always had the ability to put 70% and sometimes 100% of the portfolio in one single bet. The choice was always very difficult and actually required nerves of steel but somehow it came naturally to me. In my experience, the 80% portfolio bet always gave me ~20% compounded return and the rest 20% (which I did because I have been taught in my MBA that I should diversify) always performed horribly.

These investments are like kids. The lesser you have, the more focused you are on them. The results are naturally good.

So as of today I am 80% invested in HPQ. I started buying it at ~$21/sh and then increased my bet drastically as HPQ approached $13/sh range. Till date it has given me ~20% and in next five years it will beat any index / fund on this planet. Just be patient and let the laws of compounding take its course.

My math is simple and I am sure I cannot convince most of you but here it is:

HPQ gives $7B (avg) FCF. Historically HPQ has given 90% of its FCF back as cash dividends and share repurchase. Assuming HPQ uses $4B/yr for repurchase, then in next five years it will use $20B to buy its own stock. At present market cap, it amounts to 50% of the company. Lets say HPQ's avg buy is at $40/sh (worst case) then $20B will fetch HPQ about 500M of its own shares and which will bring the outstanding shares to 1.4B. So at the end of fifth yr, FCF/sh = $7B/1.4B = $5 /sh. So how much would you give for a company which gives $5/sh FCF ? It varies. It will be better for investors if the price remain subdued for extended periods of time. This way HPQ can buy its own shares at low prices. The wealth gets transferred from an investor who sells to the one who stays invested.

No ETF, S&P or any fund can even come close to the kind of return.

Step One: Stay focused.

Step Two: Don't forget step one.

Satyajit Singh

Portfolio Manager,

Singh Investment Funds