I opened a set of positions worth about 1.16 lakh Indian Rupees (about 2300 USD) last Monday.I chose blue chips from different sectors.The total return from my portfolio over the last week was INR 8,232 i.e. 7.09%. Such is the world of equities. Bank deposits, in comparison, pay about 7.5 -8 % per year in India.

Remember, equities is a big, bad world. You can lose as much money as you make and more ! Let us delve into my portfolio composition and the steps I took to minimize the probability of losses.

1. I diversified across sectors – By investing sizable chunks of my portfolio in different sectors such as Banking, Energy, Telecom and Metals, I reduced the risk of all components of my portfolio falling in price at the same time, thus reducing the probable volatility of the overall portfolio. Mathematically speaking, I chose stocks whose returns are not well correlated with each other, thereby reducing the overall variance of the portfolio.

2. I picked stocks which had taken a beating in the short run – I personally believe that some amount of mean reversion occurs in the case of most stocks, discounting long term trends. Therefore, I picked stocks like Reliance Industries and Reliance Communications which did not appreciate much despite the fact that the Benchmark Index (Sensex) appreciated substantially in the same time period. They were far away from their 52-week highs. Of course, this by itself doesn’t guarantee that they wont fall further but it is my observation that stocks tend to overreact to news and correct to reflect their fundamentals over time. Thus, in my opinion, it is more likely that a stock which has climbed significantly over the short run for “flimsy” fundamental reasons is more likely to be overvalued than one that hasn’t.

3.I included stocks with  high betas – Since I was bullish on the Indian markets for the short run, I chose stocks with high betas such as ICICI Bank and Tata Steel . In other words, I chose stocks which are more likely to follow the general market. Incidentally, high beta stocks tend to be volatile and give above average returns.

4. I chose stocks on whom I was bullish in the long run – I am extremely bullish on all the stocks I chose as far as the long run is concerned. Thus, even if they fell in value temporarily, I could hold on to them for long run and have sold them when they appreciated in value. Of course, I had to set stop losses in order to manage my risk, but that is a different story.

5. I chose blue chip stocks – I chose profitable companies that are leaders in their field, with plenty of cash and ample liquidity to meet short term obligations. I also made sure that I chose companies with high growth rates. Such blue chips are less volatile than mid-caps and small caps. They are also more likely to survive hard times than others.

6.I was mentally prepared to lose money in the short run - Equities is a high-risk and high reward business. I only invest the money that I dont currently need and am ok with losing some money in the short run. This is what lets me sleep peacefully at night.

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