If we com­pare

Dalal Street Investment Journal - - SPECIAL REPORT -

the per­for­mance of Port­fo­lio A ver­sus Port­fo­lio B, one can im­me­di­ately an­a­lyse the im­pact of port­fo­lio weight­ing on the fi­nal port­fo­lio per­for­mance. By merely play­ing deftly with the port­fo­lio weigh­tages, an in­vestor can im­prove the over­all port­fo­lio per­for­mance im­mensely. While there is no sure shot way of know­ing which stocks will out­per­form the oth­ers in the port­fo­lio, a sea­soned in­vestor usu­ally in­vests a sig­nif­i­cant por­tion of the port­fo­lio on the stocks that are high on his/her con­vic­tion list. Ideally, a port­fo­lio should be weighted in di­rect pro­por­tion to how much con­fi­dence you have in each pick. Goes with­out say­ing that if an in­vestor has a lot of con­fi­dence in the long term out­look and the val­u­a­tion of a stock, then it should be weighted more heav­ily than a stock which is be­ing in­cluded in the port­fo­lio by the in­vestor sim­ply for di­ver­si­fi­ca­tion pur­pose only. If in­vestors find it too com­pli­cated to prop­erly al­lo­cate weigh­tages to in­di­vid­ual stocks, a sim­ple port­fo­lio weight­ing strat­egy that can be adopted is “equal weigh­tage strat­egy”. Equal weight is type of weight­ing that gives sim­i­lar weigh­tage or im­por­tance to each stock in the port­fo­lio. In an equal weighted port­fo­lio, the small­est of com­pa­nies are given the same weigh­tage as the large-cap com­pa­nies. For sim­i­lar stocks port­fo­lio such as Port­fo­lio A and Port­fo­lio B, if

equal weigh­tage strat­egy is adopted, the per­for­mance is noth­ing short of im­pres­sive. Log­i­cally, why equal weighted port­fo­lio may out­per­form is easy to an­a­lyse. In equal weighted port­fo­lio, an in­vestor will tend to give sim­i­lar weigh­tage to small-cap, mid-cap and value stocks as to the large-cap growth stocks. His­tor­i­cally, it is proven that small-caps and mid-caps have pro­vided bet­ter re­turns than large-caps, and hence, there is a bet­ter chance of

port­fo­lio out­per­for­mance. An­other ben­e­fit of equal weighted port­fo­lio is that equal weight­ing re­sults in broader sec­tor par­tic­i­pa­tion.


In an at­tempt to beat the mar­kets, in­vestors are so fo­cused on iden­ti­fy­ing the right stocks that they ig­nore two of the most cru­cial as­pects of port­fo­lio man­age­ment viz., port­fo­lio weight­ing and in­vest­ment hori­zon. No wealth will be cre­ated if an in­vestor pur­chases a right share at right price but al­lo­cates min­i­mal weight to the stock in the port­fo­lio and sell the same share within a few months of pur­chas­ing it.

It is cru­cial to un­der­stand that a good share, when in­cluded in the port­fo­lio, should be given enough time to gen­er­ate

re­turns. Most in­vestors end up buy­ing a right share at the right time, but sell­ing it pre­ma­turely.

All the three pa­ram­e­ters such as port­fo­lio stock se­lec­tion and mar­ket tim­ing, port­fo­lio weight­ing and abil­ity to stay in­vested for long-term will de­ter­mine the port­fo­lio re­turns in real sense over a pe­riod of time. In­vestor ought to give ad­e­quate weigh­tage for all the three pa­ram­e­ters in or­der to beat the mar­kets con­sis­tently over a pe­riod of time.

It is im­por­tant that in­vestors main­tain a strate­gic per­spec­tive in an glob­alised in­vest­ing world. Of­ten, the most pow­er­ful in­vest­ment ideas are sim­ple ones. Choos­ing a stan­dard­ised weight­ing op­tion is un­likely to be the best weight­ing op­tion for in­vestors. How­ever, if an in­vestor is not sure of con­vic­tion stocks and is un­sure of which stocks to be given higher weigh­tages, then adopt­ing an equal weigh­tage strat­egy seems like a good strat­egy to adopt for beat­ing the key bench­mark in­dices such as Nifty and Sen­sex.

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