Good morning my dear readers,

A manic week comes to an end. The thought of Friday is comforting though.

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Today's letter is short but worth thinking about, on effective stock allocation.

Personally, I follow a simple rule of thumb on this matter..and it has served me well on multiple occasions.

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Firstly, we divide stocks in two categories.

1- The Narrative Stage: In Bull markets, a lot of stocks run up big time based on 'Strong Guidance' from managements and narratives built around 'Future Earnings'.

These narratives get built on potential government policies or expected movements in business cycles etc.

And while investing on narratives sometimes is necessary too, I have learnt to invest 'light' when a stock is in the narrative stage, where a story of future earnings growth is projected, but there are no actual earnings presently.

This is a double edged sword and can cut both ways. If the 'expected' earnings do not eventually come through, we can see significant drawdown in our portfolio.

Hence, a clear strategy for me, while investing in narrative stage, invest 50% lesser of what I would normally invest in a company and then add more money on rise as the company starts performing.

(Basically, narrative stage is not the time to be a hero).

2- Actual earnings stage: Now, there will be plenty of instances when you actually come across a company which is attractively valued and also, it has good core earnings at present.

(Typically happen around Demergers, when certain Spin offs may see forced selling from legacy investors or in Bearish/Sideways markets when even good earnings cannot lift up a stock in the short run).

This, what many legendary investors famously call, is a Juicy Full Toss.

So when we come across such an opportunity, you will firstly feel it in your bones, and when you do, you must learn to back your instincts and invest a bit more than usual.

(Ofcourse, you should understand your risk taking appetite first as risk parameter).

Because, in many big investors interviews, I have often heard them say that their biggest past regrets have been that they havent invested 'heavily enough' when opportunity presented them right in their faces.

For me, when you understand a sector well and are bullish on the sector, this kind of thinking can help an investor very well.

(Again, to reiterate, it may not be for everyone. Important to understand, how much volatility can you face personally first).

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Conclusion: You can invest how you like when the 'earnings are already present'.

But be vigilant while investing in the 'narrative phase', invest lighter than usual as most investment accidents happen when we build in the moon in our assumptions of earnings and mostly disappointment follows.

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Hope this helps. That is all from me today my friends, short and simple.

See you on Monday. Until then, enjoy the weather and your coffee.

My Best,

Neil Bahal

Founder

Negen Capital