Don’t Try Concentrated Investing Like I Did? 40% Allocation & Stock Down 50%

Don’t Try Concentrated Investing Like I Did? 40% Allocation & Stock Down 50%

#How My Concentrated Investing Strategy Backfired

Investing in stocks is an art. There is no right or wrong way to make money in stock market. It is for us to figure out the style of investing that suits us the best.

Out of many types of investors there is a bunch of them out there who are strongly against diversifying their portfolio in many different companies.

Instead they hold a small bunch of companies say 6 or slightly more and invest all their capital in them which is known as concentrated investing.

After my initial success in stock market from 2013 to 2016, I began to build a concentrated portfolio like investing 25% or more of my capital in a single company. In they year 2016, I invested 30% of capital in a single stock named Arti Drugs and after holding it for a year or so it gave a quick 35 to 40% return.

This boosted my confidence immensely and opened the path for a big mistake I was about to make unknowingly in the coming years.

My dear readers. I have decided to split this post on concentrated investing in two parts.

In the first part (today’s post), I will use one of the biggest mistakes of my investing career as a shining example of the havoc an extremely concentrated investing portfolio can create in your life. In fact the risk can be too huge to fathom.

We will also look at some lessons I learnt the hard way.

So the first part is my story with its ups and downs which then forms the base for the second post.

In the second part we will assess the risks of a concentrated investing strategy and the need to diversify our capital in stock market. We will also look at what should be an ideal allocation to a single company or a business sector (automobiles, chemicals etc.)

What I am about to share is too risky to do with your capital. Don’t even think about it but do read about it to understand the perils of an overly concentrated portfolio

1. Beginning Of A Love Affair With A Coffee Exporting Company

Coffee

In December 2017, on a usual work day while trying to search for a good company to invest my capital, I came across the stock of a coffee exporter from India, named CCL Products.

CCL Products produces numerous blends of instant coffee for global coffee manufacturers.

It produces Spray dried and Freeze dried coffee. In case you are interestedyou can read in detail about Spray dried and Freeze dried coffee here.

They also have their own brand of instant coffee known as Continental Coffee.

Company imports green coffee beans from various countries and then processes these green coffee beans. Processing involves things like cleaning coffee beans, roasting, grinding, getting the coffee extract.

Once we have the coffee extract they produce spray dried, freeze dried coffee or liquid coffee.

2. Why Did I Decide To Invest A Lot Of Money In CCL Products

CCL Products looked good on fundamental parameters like high ROCE, high Operating profit margin etc.

You can read more about important financial parameters for finding good companies here and here

What really got me excited about this company in December 2017 was there plan to set up a new freeze dried instant coffee plant in SEZ (Special Economic Zone) in Chittoor, Andhra Pradesh with a capacity of 5000 tonnes.

By Q4FY18 (quarter ending Mar 2108) they had already spent close to 250 crore to setup this new plant and the plant was to be operational by Q2FY19 (around July to September 2018).

In fact the management was confident that within the first year of operations, 5000 tonne freeze dried plant would be utilized to the extent of 50%. The management also said that there will be significant boost to the profits as this plant was in SEZ which was tax free for next 5 years.

This was music to my ears. You can read excerpts from Bloomberg’s interview with C Srishant Garu here titled “CCL expects 30% volume growth in next two years

Please note that freeze dried coffee sells at a premium to spray dried coffee. Hence once this plant was setup it would have led to increase in sales at a higher margin.

Apart from the freeze dried plant which would have brought a boost to profitability, CCL was revamping its private label brand named “Continental Coffee” just like we have Nestle and Bru.

On a side note I will definitely recommend you try their various instant coffee blends by ordering online. I really liked their instant coffee products. You can find their entire range of coffee here.

Now the company had major plans to make “Continental coffee” a substantial portion of their revenue is next few years. However the challenge would be to take on the likes of Nestle and Bru.

The news of freeze dried plant setup and establishing their own private label “Continental coffee” brand made me so optimistic about the company that I really dreamt of making a lot of money by investing in this company.

So initially I decided to allocate 15% of my capital in the stock of CCL Products.

3. Sowing The Seeds Of My Biggest Mistake: Concentrated Investing Portfolio

Making A Mistake Concentrated Investing

I was for some reason so optimistic about this company that I started buying the stock at around 278 to 280 levels from Jan 2018 and kept buying it over a period of more than a year until July 2019.

As per the management their freeze dried plant was to begin by Q2FY19 (quarter ending Sep 2018) but I was not aware that the plant will begin a trial production first after which they will have to seek approvals from their client for selling freeze dried coffee from this new plant.

All this meant that the freeze dried plant cannot contribute anything to the revenue until Q1FY20 (i.e by April 2019) as guided by the management in the conference call of Q2FY19.

By this time as stock went through several ups and downs from 320 to 225 and I was buying it all along (from A to B as shown in chart below); Gradually allocating 40% of my capital in CCL Products.

How my concentrated investing strategy in CCL Products backfired. A story in stock charts

Then in Q4FY19 (quarter ending Mar 2019) they lost one major customer which impacted their sales and profitability.

In the meantime in Q1FY20 (Apr – June 19 quarter) the much awaited freeze dried plant started running and in a few quarters the sales from this plant would pick up.

But market forces had a different plant then what I desired. Instead of rising the stock kept falling from 300 Rs in Mar19 to 182 in Nov19. This was also due to decline in profit reported by CCL from Mar 19 quarter to Sep 19 quarter as shown below.

ccl products net profit declines from Mar 19 quarter to Sep 19 quarter
CCL Products Net Profit Declines in Mar 19 to Sep 19 Quarter vs Mar 18 to Sep 18 Quarter

Q4FY19 36cr vs Q4FY18 47 cr

Q1FY20 35cr vs Q1FY19 39 cr

Q2FY20 42cr vs Q2FY19 47 cr.

3. A Ray Of Hope, A Bit Of Sunshine

After a dismal set of results from Mar 19 quarter to Sep 19 quarter, the company finally posted a profit of 47 cr in Dec 19 quarter vs 33 cr in Dec 18 quarter ( a growth of 42.42%). By this time the freeze dried plant that started in April 2019 was also picking up steam and started adding to sales and gave a boost to profitability.

Post this the stock started rising from 180 in Dec 19 to 250 by Feb 20 (as marked by point D in stock chart below). Finally after a long wait things were looking on track to reap some gains.

Little did I know that in just a matter of weeks the world economy was about to completely shutdown.

How my concentrated investing strategy in CCL Products backfired. A story in stock charts

4. 40% Allocation & Stock Falls 50% From My Purchase Price

As the world economy shutdown and the stock markets stuttered beginning their sharp fall in last week of Feb 2020, I kept holding my position in CCL. As gut wrenching as it can be I saw 40% of my capital reduced to half on paper.

The pressure was immense. Each passing day the stock of CCL kept falling like nine pins from a price of 250 to 150 in just a month (as shown by points E and F in chart above).

No matter what anyone says but the experience of a stock market crash seeing 40% of your capital vanishing in thin air is as thrilling as it can be.

Fear will grip you over and you will not be able to think about any other investment. It just hits you with so much force that unless you have the will to stay in the game and fight back you cannot succeed in stock market.

So just like a shattered man still hoping for some sunshine, I gathered myself up and started evaluating my options logically.

5. Keeping The Fear Aside & Fighting To Think Logically

Each second in the stock market from last week of Feb 20 to Mar 20 felt like years. With utter chaos and 40% of my capital stuck in CCL, it was time to start thinking rationally.

I went for frequent walks in the evenings and evaluated my options and I figured out the following:

1. It will be absolute insanity to sell my shares of CCL at half the price when the company was fundamentally sound. After all people will continue to drink coffee. So I decided to hold on to this stock.

2. I was looking for the promoter to buy shares in his own company during this stock market crash as that would instill a lot of confidence in me as an investor. 

As expected promoters of CCL who were already buying shares even before the crash, increased their quantum of purchase as the market went down (as shown below). This really gave me the courage to hang in there (as shown below).

promoters of CCL Products increasing stake in the company during stock market crash 2020
promoters of CCL Products increasing stake in the company during stock market crash 2020

3. I do acknowledge that 40% capital was stuck at least for sometime but there was no point lamenting over it.

Instead of brooding over 40% capital and missing the opportunities that came along with the crash, it was better to hold CCL and forget about it for sometime.

Therefore I dedicated all my energy to investing in stocks of good companies that were hammered in the stock market crash. Luckily the balance 60% capital was majorly in Fixed Deposits as I had been anticipating a market crash for quite sometime since early 2019.

I already had a watchlist in place and it was time to start buying gradually.

Lesson No 1: Sometimes in life you may be stuck badly. In such situations instead of focusing on the negative aspect try being an optimist and figure out what can be done.

I am pretty sure you will not regret this change in outlook. It has the power to take you places.

Lesson No 2: If you do not invest in stocks of fundamentally sound companies then the risk of losing money becomes real. I was saved because CCL Products is a fundamentally sound company.

The loss I had was on paper. As I did not sell in panic and as the company was fundamentally sound, I recovered my capital.

6. Freeing Up 40% Capital From CCL Due To Better Investment Options Available

By May 2020, as stock markets started to rise, taking everyone by surprise, I had already started investing balance 60% of my capital in pharmaceutical, manufacturing, basmati rice exporters and other companies.

I could see some good opportunities in auto sector and some manufacturing companies emerging. These companies offered a much higher growth opportunity than CCL Products which was not able to show any meaningful growth in profits.

The understanding was that once the lockdown was lifted people may show a preference for personal vehicles and two wheelers are the most basic unit that people could buy.

Also the management tone of some manufacturing companies I track suddenly turned optimistic as lockdown started lifting around July and August.

Therefore in the month of Aug 2020, as stock of CCL was in the range of 260 to 270 Rs, I started to sell my shares at a loss of 3% to 4% gradually over August and September.

Rightfully so the stock of some auto ancillary companies I bought with this freed up capital moved up by 40% in a short span of time while stock of manufacturing companies did even better.

While the stock of CCL is still languishing at 236 levels as of 28th Mar 2021.

The main reason for exiting CCL was that their profits were still flat as compared to last year and their customers were asking them to postpone their coffee orders.

I think it was a great decision to move away from CCL. Had I not done this I would have been sitting like a duck with no returns from 40% of my capital.

Still CCL Products is definitely on my watchlist. If their outlook looks promising I may think of investing again.

Lesson No 3: In life or investing do not get hooked to an idea. If you get emotionally attached to a stock your returns can suffer. So when facts change, be agile and adapt to the circumstances

Lesson No 4: In Life we can always convert our weakness to strength. Its just about not panicking, being courageous and doing what is right even if means taking some loss for a bigger gain.

7. Time To Conclude With The Final Lesson

In investing, sometimes you can end up misjudging a company. While my endeavour is to always search for growth stories like La Opala RG in 2012, Aarti Drugs and Suven Pharma in 2013 to name a few, you are bound to goof up sometime.

So we must assess what went wrong with our investment thesis. Like in case of CCL Products, I made two mistakes

Lesson No 5: Assumed that the company would grow significantly but the growth never showed up

Lesson No 6: Invested too much capital 40% and the money did not yield any gains except some dividends.

So then how much to invest in one stock? Now that’s a topic for the next post.

With these thoughts I will end this post. In the next post we will discuss the importance of diversification to a certain extent considering some real life investing experiences.

I hope you like the article. Don’t forget to share the post.

Disclaimer: Stocks mentioned in the post are only for tutorial purpose. Author does not recommend any stock. Please do you due diligence before investing.

Subscribe Now. Keep Yourself Updated with the latest posts on investing, personal finance, wealth creation mindset, mindfulness and more from Introspecting Investor

Leave a Reply