I’m Dr. Sandeep Gupta, founder director of D V Stocks. I’m one of the few experts in India who conducts equity research following Fusion Analysis.
Fusion Analysis is an art whereby the researcher combines principle of Fundamental, Technical and Quantitative Analysis.
Let me to explain the process to you.
Step-1: Screening – There are more than 5,000 listed companies on Indian bourses, about 10% of these are large cap, 30%-35% are Mid-cap and rest are small cap companies. To screen from such a large universe would require lots of data mining, hence, to filter from such large universe, we start with price- we choose only those companies, which are at least quoting @ 50x their face value (obviously there are some exception to these)
Step-2: Filtering: – we look into the sectors where they’re working, the sectors we prefer are Social Infrastructure such as education, Consumer durables, Daily Consumptions such as Foods, Garments, Conglomerates with strong brands.
Step-3: Applying Fundamental tools: – after we’ve filtered the selected stocks, we apply fundamental tools such as GARP, CANSLIM and we see that revenues and margins should be consistently improving; we see that companies exhibit better ROE and ROCE than their peers in the same sector. The stocks should be having reasonable leverage (to enhance ROE; but no that high to create risk in balance sheet); When the stocks fit into these criteria, we are ready to take them to next filter of Quantitative Analysis and Technical Analysis.
Step-4: Applying Quantitative & Technical Analysis Tools: – we apply our proprietary quantitative analysis tool called Stock-Rock to pinpoint the entry point in the stock, we also look at the five year chart of the stock to see its price behavior and major support and resistance points (this would be further discussed in future interactions).
This is how we choose our stocks to invest.
After choosing the respective stocks by application of Fusion Analysis our next job is to construct the portfolio to achieve the respective goals of the investors, which may be ranging from solid steady returns with minimal volatility to high growth with acceptance of moderate to high volatility…
Thus, we come to our next step of Constructing Portfolio: After, we have selected stocks we combine 12-15 stocks to construct appropriate portfolio according to goal of the investors.
We keep in mind of three main factors while constructing the portfolio:
A. Number of stocks: optimal nu is 12-14 (but it shouldn’t be less than 9-10 and not more than 18- 20 stocks
B. Beta: we choose beta of stocks according to our goal—Low beta for steady return with low volatility and moderate to high beta for high growth portfolio
C. Correlation of stocks: the stocks should be having low correlation with NIFTY/Sensex and low correlation with each other, this maximize return while keeping risk (volatility) in portfolio minimal.
This is how we construct the portfolio. We’ll discuss in detail what parameters do we see to measure the risk reward of a portfolio. Just a glimps, fund managers use parameters such as Sharpe Ratio, Treynors Ratio and Sortino Ratio etc to gauge risk/reward ratio of a portfolio.
Hope you benefit from this reading…
You can watch the video on the same as well…