Here is how I work Trading Blocks:
1). Maintain a small collection of High Growth companies as High Confidence core positions with established allocations. This is the easy part. I follow a group of what appears to be really smart investors who charge me money to look at their cards. I collate the data, determine common threads and recommendations to arrive at potential portfolio candidates. I then perform and excruciatingly detailed 15 minute Deep Dive to determine if the company fits my portfolio structure and goals.
- The portfolio is arranged as a basketball roster with the following roles:
A) STARTERS - Sorta Extremely High Confidence Companies (SEHCC) that receive the bulk of my investment funds. I typically want 70% of the portfolio invested in these companies. An example here would currently be
B) The Bench - High Confidence Companies, typically with more history behind them but still with a lot of upside potential. I allocate up to 20% of the portfolio to these players.
C) Scout Team - These companies fill out the roster and are typically ‘story stocks’ that if successful could move into Bench or STARTER roles. I allocate a maximum of 10% of the portfolio to these guys.
Ok…Ok but what has that got to do with Trading Blocks? Well…as it turns out quite a lot. By limiting the portfolio to a manageable number of companies I can stay up-to-speed, more or less, on how they trade. So, for instance, when a STARTER drops 3-5% on no real news other than market ebb and flow - it can create a short term TB opportunity. The level of confidence you have in the company along with the knowledge/familiarity you have with the companies market trading tendencies determines the course of action.
The course of action is whether to create a TB or not with the second decision being whether the TB will represent 5% or 10% of that companies core position and allocation within the portfolio. It is critical to understand that the companies core allocation is never breached by a TB. Which means that my basketball team of companies has two profiles: 1 - a LTBH component; and, 2 - the dynamics of repetitive short term gains which can add substantially to long term performance.
When I first initiated the TB strategy I only added them to STARTERS and limited them to only 1 per company. As time has gone by and the strategy has proved successful I have sometimes added a 2nd TB to STARTERS and now extend TBs to other players on the roster. A critical point here is that patience is the key. Sometimes after previous days drop a company will shoot right back up the next day. Sometimes it may take a few weeks. Regardless, TBs are designed to be the topping on a core allocation that you are comfortable maintaining for as long as it takes. This can’t be emphasized enough.
When to sell the TB is a somewhat easier decision: Whenever it makes you a short term profit that you couldn’t get anywhere else - excepting pony and dog tracks - which you then tuck away in your overall returns all the ready to be employed again in another TB when the opportunity arises.
Note: It was recently pointed out on this board by StockNovice that you can use Sell Limits to automatically collect your TB profit. I hadn’t thought of that but in my defense I do drink a lot of wine. This is both a good idea and a bad idea. (Not the wine drinking - rather StockNovice’s selling advice.). It’s really good because it totally removes the the process of constantly monitoring the TB but bad in that it totally limits your upside.
Should you try this? It depends on your own investing strategies and quirks. If you grew up as a LTBH then it might seem both the dreaded “short term trader” implications as well as a betrayer of the sacrosanct LTBH tribe and faithful. On the other hand, if you, as a devotee of the LTBH tribe, are tired of being on the market roller coaster and/or being smacked around then perhaps it might work for you.
As for the systems quirkyness - well beauty may be in the eye of the beholder but profits are safely in the bank…as it were. For further edification on Quirks and their relationship to the TB strategy I recommend:
The Bobwhite Quail: Its Habits, Preservation and Increase
Herbert L Stoddard