15% is a whole lot

My investing portfolio (including the cash component) is 99% of my net worth. I take money out every month or two to live on, but other than that, it is all I have. Therefore, I try to make sure not to lose too much of it at a time.

Today is a good example. TTD is a great company, and they even had a solid quarter, but the stock is down a lot. Because I only had a ~5% position, I can absorb the hit no problem, and consider adding. But if I’d had a 30% position, or a 50% position, or an 85% position, it would meaningfully damage my overall financial position.

I know Saul already said his piece about one-stock portfolios, but given that we have in the past had many people say their largest position ranges from 25% to 50% of their portfolio, I wanted to add my thoughts here. I implore you: don’t let positions get over about 10 or 15%, no matter how confident you are! We have identified several great companies. Spread the wealth among them!

Just because I know someone will bring it up if I don’t acknowledge it: yes, I realize Saul has recently let some positions grow to about 20%. If you feel you are as adept as Saul, by all means do likewise. Know thyself.

I’d love to hear from some of you who have had positions that were (or are) a much larger percentage of your net worth, but have trimmed them down. I’m sure you’ve seen the benefits.

Thanks, and be careful out there,
Bear

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Bear, this is obviously your practice and if someone wants to hold larger positions that’s their prerogative. But the other problem that should be mentioned is that when positions and assets become too large, one is more likely to let emotions start making the decisions instead of logic.

It’s real easy to play a cool hand when $1 is on the line. But real easy to start sweating when millions are on the line if you’re in the poker championship finals.

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So the allocation should be based on cost or market value? and what’s the pro and cons of each?

I get the well-intentioned timing here, but TTD is also still up YTD 58-60%.

Sometimes allocations grow into outsized positions. If you cut them down every time they get too big, you lose out on gains too.

Like you stated, Saul has had 20% positions over the past year a few times that I recall.

And if you just took a LTBH approach and always pared back winners so that allocations were relatively even and under 10%, then you would be treading water with stocks like NEWR, DOCU, SQ, ANET, NTNX, and others.

SAIL is down 28% today. Probably would have been a better example to lead with.

Dreamer

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A 15% drop in a 15% position is still just 2.25% of the overall portfolio.

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After today’s haircut my TTD position is 5,5% of my total portfolio. Got them already at $58, but must say a day like this still hurts. No matter how much ‘profit’ is in the position yet.

  • Paul -

Dreamer: SAIL is down 28% today. Probably would have been a better example to lead with.

IRDoc: A 15% drop in a 15% position is still just 2.25% of the overall portfolio.

I think I was unclear. The “15%” I was referencing wasn’t the drop in TTD. I was saying that a 15% position is a very large position. To IRDoc’s point, even a small 15% drop in a company that’s 50% of your portfolio is a huge 7.5% drop in your net worth. If you have an 85% position that drops 30%…you’re not going to be able to recover from that for months (at best).

My point was that there’s just no reason to let positions grow over 10 or 15%. Trimming to keep positions around that level is simply prudent investing. As I said, if you feel you’re as good as Saul, you have my blessing to take it to 20%.

Bear

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This is great advice, I would agree that 10% really should be the max for just about everybody. I’ve had 20% positions before and when they drop 20% in a day and 40% or more in a week/month it really hurts and is hard to come back from.

TTD seems like a really great firm, mad I didn’t buy it last year, but nothing goes straight up forever.

Everybody be careful out there.

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My point was that there’s just no reason to let positions grow over 10 or 15%. Trimming to keep positions around that level is simply prudent investing. As I said, if you feel you’re as good as Saul, you have my blessing to take it to 20%.

The reason would be to not dilute your best ideas. Obviously each person needs to decide what they can handle. We’ve seen days where all the growth stocks here drop 3-7%. You could have no positions over 10% and still lose 5% of your entire portfolio. There’s no magic in the 10-15% range. Some would argue 5% is too high, some say 20%, on the other hand if you just bought $1k in AAPL 20 years ago and just forgot about it without ever buying another stock you would be very happy having 100% allocation in one company. If you just buy a set position size in many companies and let them run forever you could still do very well just by picking a few Monster winners.

Anyway I realize this is off topic so that’s all I’ll say on the matter.

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So I agree that the amount you invest should never be say more then 10% in any one stock, I don’t agree that if a position does incredibly well that you need to keep trimming it down along the way.

Your theory would mean that over the last decade or more someone should have trimmed companies like NFLX, AMZN all along their incredible runs. These two names for example if you had held throughout the last 15 years in a portfolio of 20 names, and the rest just had average market matching returns would have carried the entire portfolio to pretty fantastic gains.

If the story doesn’t change, why trim?

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I thought allocation discussions were verboten.

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This is great advice, I would agree that 10% really should be the max for just about everybody. I’ve had 20% positions before and when they drop 20% in a day and 40% or more in a week/month it really hurts and is hard to come back from.

Thanks Najdorf.

To others…In regards to buying $1,000 of a stock and holding it for 15 years, that’s not what I’m taking about. I’m talking about 15% of one’s net worth. When you invest like many of us do here, you’d like to be able to add shares when something goes down for a reason that you don’t think is justified. I can take my lumps when something goes down for a good reason: I sold SAIL this morning, but I have added to TTD, as I don’t think this is the beginning of a slow-down spiral. I think next quarter growth will re-accelerate (though I’d rather just call it fluctuation).

Anyway, let’s end this here. I apologize, I suppose this is actually off-topic as it relates more to portfolio management than these particular stocks. I just wanted to make sure everyone out there realizes that ANY one company, even one that we love that is doing well, can take a hit at any time. To have more than 15% of your net worth in a company just because it is your best idea…to me that means either you aren’t trying to allocate optimally, or you overestimate your ability to predict which of your stocks will perform the best. If that’s the case I suggest index funds.

Bear

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For what it’s worth, I don’t think there is a one-size-fits-all answer here. Different people will have a different tolerance for portfolio concentration.

MDB is around 25% of my net worth. I’m comfortable with it, plan to hold for 20 years, and ready to take the ups and downs. I realize it could easily get to 50% of my net worth in that time, and I’m ok with that as well - under current circumstances. Here are the factors that make me comfortable:

  1. Financial Stability - I have a job and don’t need to dip into my investments on a regular basis. This is really important - Bear’s statement in his original post was: I take money out every month or two to live on. In my case, I don’t expect to need to take money out for 10 years at least. So I am not concerned about a drop that lasts a year. If I was taking money out, unless my portfolio was at least 3 times what I estimated I would need, I would have lots of investments in safe or differently moving segments, to make sure I always had my required income.

  2. Emotional Confidence: I know myself, having invested for over 25 years, and know I don’t panic or get too emotional or big downturns. I think this is really important too - know who you are - not who you would like to be.

  3. I know MongoDB better than the vast majority of investors, and will have a good chance to see, before the market, any real long term problems that could come up.

I think this type of evaluation on any stock that starts taking up a larger portion of your portfolio is valuable. And of course your own emotional reaction - does your stomach churn if your entire portfolio falls 5% because your biggest position fell 20% on FUD?

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Hi Paul and since you asked, I’m one of the guys that has too much in TTD. I have 2 portfolios plus a 401K. For the 2 portfolios that I manage TTD is ~ 45% of both portfolios. So I’m not happy about today’s drop but I’m not really concerned. I’ve suffered big drops before in other stocks and I see how they react. Especially with a beat and raise. I could be wrong but I have a high confidence that TTD is coming back and I did start buying around $25. I normally stick to ~ 20% positions for my best stock but this ended up being a mistake. I bought an extra portion in Dec that I planned to sell after it went up a just a little but it kept going up and I never got around to selling it. Then I got my tax bill and ouch I decided maybe I should wait for a year to get the reduced capital gains tax. So I’m stuck having to wait for a year (7 more months now) until I sell it . I think I’ll be fine. Fortunately I don’t need the money to live on because I’m still working and I also have an Army
pension plus I max out my Social Security pay. But I still realize it is not good portfolio management/planning. BTW Many of my other stocks went up today but of course TTD cancelled all of that out. Thanks for asking :slight_smile:

I 100% agree with Bear’s advice. No investor (Saul excluded) is 100% sure about how events in the future will affect a company and, almost by definition - because of the nature of the companies invested in by this group - our companies are more prone to taking large hits than some other types.

We are, with these issues, constantly swinging for home runs, rather than hitting singles, with the additional risk of disappointment that entails.

While it’s probably sub-optimal, I’ve always felt that it’s not a profit in a volatile stock until it gets sold and I’m a fan of re-balancing if a position gets too large. Sure there have been some cases when I could have held a larger position in a stock that kept going up forever (say Amazon), but there are also numerous cases where I reaped rewards along the way on stock that unexpectedly became permanently broken.

Each of us has to make our own decisions, but mine attempts to try to keep from becoming over-confident that I can predict the future.

Jeff

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Hi Bear,
If you recall…NFLX grew to be 30% of my portfolio. It didn’t happen because I was adding more - it occurred because of organic growth. I trimmed a couple of times, and now it represents 13%. At a growth rate of 39.1% YTD - it is still in my top 10 in terms of growth. I have to say, it was a lot harder to sell than I thought it should be. It’s interesting how our emotions continue to seep into our decisions.

My portfolio is up 38% for the year.

Have a great weekend,

~TracyK

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