Changing Thinking & Asset Allocation

Investment Analysis Clubs Saul’s Investing Discussions
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First, I’d like to thank Saul for improving my investing in a meaningful way. Up until this year, I was lazy. I used TMF recommendations and followed their updates. I was quicker to sell than TMF, but I was not doing the work of tracking earnings and establishing my own sell criteria. My returns have improved now that I have followed the 1 yr trailing PEG. I enjoyed reading many articles and spent a good bit of time understanding the business, but I just did not take the step to track and keep records of earnings.

I have the background to have done it. I have read several great books TMF’s Investment Guide, Lynch, Buffet, the Intelligent Investor, but I never ran the numbers for myself. As it turned out, about 2/3 of my stocks matched Saul’s, but I did not have a good selling discipline(tip of the hat to Saul) which makes all the difference in the world. I tried some of the portfolio services (Alpha, Supernova, Options, and Pro) picking and choosing recommendations I liked, but never following any service completely except Alpha :frowning: As Saul said in one of his earlier posts, they to are often unwilling to sell until well after things have gone undeniably bad. That said, please keep in mind me reading the actual balance sheets and press releases is new to me so if I goof something up on this board, please be patient and help me out if I get something confused.

Although each of our personal situations is different, I’d suggest that there are some ways to improve performance further. First, my situation is a bit extreme. At 51 years of age, I thought I was in decent shape when I went to the doctor for heart burn in June, two days later I had quadruple bypass surgery so my shelf life may not be what yours is. Also, I cannot get my wife interested in investing to save her life so I need to limit my downside. Also, I have barely enough to retire, but plan on working for the time being to get my kids through college and secure a better retirement.

With that said, I’d suggest there are some portfolio management strategies worth considering:

  1. Why not limit the initial investment in a stock to 5%? There are so many great stocks out there to choose from. Does it make sense to put one’s initial eggs too much into one basket.

  2. Why limit the upper stock allocation? I understand that 20% as an upper limit is one way to reduce risk and have money to explore new ideas, but it can really cap the gains as long as the thesis remains intact.

  3. After 6 straight years of QE and low interest, would it make sense to put some money aside for the inevitable market drop? I have 25% in VFSTX (2y corporate bonds), and I plan on investing that after a 20% drop in the market. I could be wrong, but I feel better about that than missing out on lower priced stocks that have an even greater appreciation potential as Morgan Housel recently suggested. Again, I might not have the shelf life to take care of my family if my plumbing doesn’t stay straightened out so I may be more risk averse than most of you.

  4. If the story is REALLY, REALLY compelling, why not dip your toe in for a tiny fraction of your holdings? Maybe I have a compulsive gambling side of me, but it adds a bit of fun to hold two stocks that may or may not be sound (1% in ZOES, and 2% in FEYE) before they may or may not explode.

Anyway, those are a few ideas you may want to consider. Thanks again Saul. Your discipline, rigor, and willingness to share have made all the difference in my investment performance.

I appreciate your help.

Best Regards,

bulwnkl

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1. Why not limit the initial investment in a stock to 5%? There are so many great stocks out there to choose from. Does it make sense to put one’s initial eggs too much into one basket.

Hi bulwnkl
I usually do start with just about 5% and add later as they are growing.

2. Why limit the upper stock allocation? I understand that 20% as an upper limit is one way to reduce risk and have money to explore new ideas, but it can really cap the gains as long as the thesis remains intact.

It makes me uncomfortable to have so much of my family assets tied up in one stock. In addition, I don’t want the results of one stock to outweigh all the other good selections

3. After 6 straight years of QE and low interest, would it make sense to put some money aside for the inevitable market drop? I have 25% in VFSTX (2y corporate bonds), and I plan on investing that after a 20% drop in the market.

By the same reasoning it would have made sense to do the same thing 6 years ago, after the huge run up in the second half of 2009, and 5 years ago, and 4 years ago, etc. There’s always an “inevitable” market drop coming, but coming when? Also, by definition, if interest rates go up, bonds will go down in value.

4. If the story is REALLY, REALLY compelling, why not dip your toe in for a tiny fraction of your holdings? Maybe I have a compulsive gambling side of me, but it adds a bit of fun to hold two stocks that may or may not be sound (1% in ZOES, and 2% in FEYE) before they may or may not explode.

I do that sometimes too, but I’m not sure that I’d invest in companies that say they won’t be profitable (even adjusted) for at least 2 or 3 years, like FEYE, although the story IS very nice…

Best,

Saul

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Hi Saul,
Your point on the bonds are true, but the interest rate risk on a two year corporate bond is minimal. It’s just a parking place until a market drop.

To your point on QE, your right that people have believed interest will go up and the recovery is long in the tooth for at least 4 years. Why now? China, the EU, and America has thrown in the towel on fiscal responsibility. Eventually, bills have to be paid. Either countries need to inflate their way out or go to austerity. Both are tough on the market.

Will that lead to the end of the world as we know it? I don’t think so. I think we are headed for a rough patch that could rival the financial crisis so I want some fresh powder.

But your right, bears have been saying things like this for years. The big difference now is China is starting to panic.

Best,

bulwnkl

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I had quadruple bypass surgery

My father-in-law had the same in his 50’s He died last Christmas at the age of 90.

Results may vary etc.

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The big difference now is China is starting to panic.

Don’t believe everything you read, especially when it comes to things written about China in the Western press.

I live in China about 25% of the time. I am not fluent in Mandarin, so I miss a lot, but I have friends and relatives there so I also have some unique insights.

First, there is a built in anti-China bias in the Western press. If you think I am wrong, try and recall the last time you read a positive story about China. Odds are you can’t. China is a big place. It has about the same land mass as the US, and roughly 4x the population. There are a lot of great, positive things going on in China that gets near zero coverage. I’m not trying to say that the negative stuff you read is untrue, only unbalanced.

So I would simply caution you when you consume the news about China starting to panic, try and think critically about what would even constitute a panic in China. If you are referring to the recent wild ride in Chinese stock market, temper that with the facts that fewer than 10% of the Chinese invest in stocks. Of those who invest, most of them are under 40 with relatively good jobs and steady incomes. And it is a rare bird in China with more than 25% of their assets in the stock market.

Or maybe you are referring to the recent devaluation of the RMB. The amount was under 3%. The Chinese have a long history of currency controls, it has been less than 10 years since they have let the Yuan float in the currency exchange markets. This was a relatively minor intervention. Especially when compared to the economic measures being taken in Japan which gets far less attention from the press.

China, the EU, and America has thrown in the towel on fiscal responsibility.

That’s a pretty bold, subjective assertion. If you fully believe that to be the truth, I suggest you get out of the market completely and put all your spare change in gold and precious stones. I’m older than you. In retrospect, I can’t think of a time when a certain segment of the financial press has not been predicting the imminent collapse of the world’s fiscal order due to the irresponsible actions of the leading economic nations. In fact, we even came close in 2008. But a subjective review of things since then should lead you to the exact opposite conclusion. As noted, there is a group of commentators who trumpet the demise of the world’s economic order. Be afraid, very afraid. Fear is a strong motivator. They always, always have something to sell which will insulate you from this disaster.

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I do not think it is at all a bold assertion to state that China, the EU, America and Japan threw in the towel on fiscal responsibility because it is self-evidently true.

I suppose a pedant could argue that ‘thrown in the towel’ is the wrong metaphor because that would imply complete surrender to the forces of reckless profligacy! But that we have to somehow row back from a previously unimaginable adolescent experiment in world debt which cannot end well should be obvious.

Right now, youth unemployment in two European countries is over 55%. That is the stuff of revolutions. Millions of the elderly, lifelong prudent savers, have been sacrificed on the altar of debt. It’s fun here. It’s not fun everywhere.

I have nothing to sell you.

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WilliB
My father-in-law had the same in his 50’s He died last Christmas at the age of 90.

That warms my heart :o)

bulwnkl