The Bread and Butter portfolio is built on the notion that any ordinary investor can generate extraordinary wealth by becoming a part-owner of businesses they use on an everyday basis โ the reason being that some of the best potential investments happen to be sitting in your own home if you look closely enough.
Take for instance the coffee that has frequented your mornings or the packaged food products youโre a loyal fan of or even the new beer youโve taken a fancy to; the majority of your favorite household names are made by companies whose success you can participate in and profit easily from.
The portfolio is thus naturally geared towards more established companies who you can keep adding to when you have extra funds (or whenever the market dips!), with the intent of rewarding an investor considerably in the longer term as the benefits of compounding kick in.
With this in mind, it is important to mention at the outset that the Bread and Butter portfolio is a more patient one than some of its counterparts, prioritizing safe and steady returns and seeking out businesses that an investor can sleep soundly on.
But does this strategy of picking companies from your kitchen actually generate outsized results?
A quick examination of this philosophy must include a hat tip to the works of ace investor Peter Lynch One Up on Wall Street and Beating the Street in which he investigates the edge that a retail investor holds over the market.
Here is a story mentioned in Beating the Street about a group of 13-year-olds who created the St. Agnes Portfolio, a social studies project which outperformed 99% of all equity mutual funds in 1990.
โA class of seventh graders at an American primary school did a social studies project on stocks, the kids had to do their own research and dig up stocks for a paper portfolio. They sent their picks to Lynch, who later invited them to a pizza dinner at the Fidelity executive dining room, illustrating their portfolio with little drawings representing each stock. Lynch just loved this because it illustrates the principle that you should only invest in what you understand, the kids portfolio consisted of toy manufacturers, makers of baseball swap cards, clothing manufacturers and outlets, Playboy Enterprises (a couple of boys chose that one), Coke, and other stocks of that ilk. With a portfolio notably lacking in glamorous technology ventures and entrepreneurial risk taking, they went for solid stocks with excellent profits and their portfolio returned 69.6% against a background of a 26.08% gain in the S&P500 in 1990/91.โ
Getting rich on Coke!
Another example of the surprising turn of fortune that can come from investing in what we know comes from the small town of Quincy, Florida which became the single richest town per capita in the entire United States post the Great Depression of the โ20s and โ30s. The root of their wealth was a banker named Pat Munroe who noticed that people were using their very last nickels during the Great Depression to buy bottles of Coca-Cola. At the time, Coca-Cola shares were cheap so not only did Munroe invest in multiple Coca-Cola shares himself, he urged many of his Quincy, Florida neighbors to do so. The strategy paid off - at least 67 of the townโs inhabitants became millionaires and Coca-Cola dividends have reportedly saved the town from every recession since.
But can we apply the same strategy to India?
Letโs take a look at some familiar examples:
๐ Assume you invested Rs. 10,000 in Dominoโs Pizzaโs India master franchise holder Jubilant Foodworks exactly 10 years ago in 2011 when the stock traded at around Rs. 430. Today the stock trades near Rs. 4,200 implying your 10,000 investment would have multiplied 9x to around INR 93,000 as of today. If you had invested Rs. 50,000, your investment would be worth around Rs. 4.7 lakh.
๐จ Similarly Rs. 50,000 invested in Asian Paints in 2011 would be worth around Rs. 5.5 lacs as of today. A 9 lakh investment would be worth nearly Rs. 1 crore today.
๐ Happy to invest and hold for 20 years? If you have ever noticed the โ3Mโ symbol on yellow sticky notes and decided to invest Rs. 50,000 in 3M India in 2001, your Rs. 50k would be worth Rs. 48 lakh today.
But if 10-20 years feels like too much (and we hope to convince you otherwise), how about 5 years ago in 2016? An investment of Rs. 50,000 in Jubilant Foodworks in 2016 would be valued at around Rs. 3.8 lakh today while Rs. 50,000 in Tata Consumer (maker of Tata Tea/Tetley among other brands) invested in 2016 would be worth Rs. 2.8 lakh today (for those wondering - a 10 lac investment in 2011 in Tata Consumer would be worth Rs. 1 crore today).
Looking beyond these two examples, companies like Hindustan Unilever, Parachute Oil maker Marico, white goods manufacturer Voltas, Kingfisher brewer United Breweries, Bata, Berger Paints, Avenue Supermarts (DMart), P&G Hygiene and several more names known well to us have all generated enormous wealth for their shareholders.
The Bread and Butter portfolio is at its core a piggy bank of these household wealth generators who you can trust to keep making money for you.
Investment Process๐ฎ
While the universe of options for the portfolio is huge given the sheer number of familiar companies listed on the exchange, we stick to certain guidelines to ensure optimum performance. Here are a few of them:
Consistency and quality of growth Companies who demonstrated steady growth in sales and profit but also hold are positioned well for the future. At a time when new entrants are constantly challenging businesses, we look for companies with considerable moats that allow them to display above-industry growth. We avoid companies with bloated balance sheets where heavy debt could play a spoilsport during tough times.
Management Quality A critical aspect of our research involves the Scuttlebutt approach, a technique coined by Phil Fisher which refers to a method of learning about a company by talking to people within the company and industry โ this allows investors to educate themselves thoroughly before making an investment.
More than one mast on the ship We seek out companies with diversified product baskets who demonstrate innovation and success in their new launches instead of relying on one product to fuel their growth.
The Trust Factor We steer away from investments where potential ESG issues or government regulations (cigarettes, casinos) form an overhang on company performance.
Taking advantage of TIME Market corrections are part and parcel of investing. The ability to not break a sweat during market dips is what we hope to offer investors but our greatest tool in this endeavor is time. Our priority will always be to hold on (if not add) to the portfolio over many years and we hope to invite investors who follow the same philosophy.
Monitoring and Rebalancing ๐ค
We monitor day and night, everyday, and rebalance every quarter! Rebalancing is primarily done for two reasons:
Portfolio Enhancement We exit stocks when there is an unfavourable change in the company's plans, increase in uncertainty around forecasted growth, change in any of the quality factors, risk-reward goes out of favour, we see growth (revenue, EBITDA, PAT or cash flows) being impacted in the future resulting in potential depreciation in price, amongst other factors. We may even add a new stock in, and remove something with less certainty of growth and stock price appreciation. Having said that, we function as part business-owners and therefore do not sell an investment on the back of a few poor quarters.
Weight Adjustment While we start with an equal-weighted portfolio, the composition of the portfolio moves over time because of a change in the prices of underlying stocks. We try and cap the weight of stocks to 10%. We usually start trimming on positions once that cap is hit. These measures result in a good risk management practice, wherein we reduce concentration risk and minimise the dependence of the portfolio on a certain stock.