The base strategy employed here is the basketball team composition of the portfolio whereby there are 5 Starters, 5 Bench companies, and up to 5 RDS companies. Broken down by targeted allocation/contract as follows:
- STARTERS - Between 65-70% of portfolio allocation
- The Bench - A maximum portfolio allocation of 20%
- Rookie Development Squad - A maximum of 10%.
Note 1: Values/Allocations vary/ebb and flow according to the cash position within the portfolio.
Note 2: Cash is used to award the most highly regarded companies with short term bonuses which we call Trading Blocks. Trading Blocks are used to enhance the bottom line on a short term basis and represent between 5-10% of the company allocation.
The purpose of using a basketball team roster for composition of a portfolio is intended to help manage a portfolio for maximum performance using a pre-designated formula for those investors comfortable in maintaining a concentrated collection of equity investments. It’s a easy to follow, foundational schematic representing a starting base which can be customized to fit individual investor needs. It mostly works in that regard and can be used with the limits of an Active 13 company roster or the Full company roster of 15 companies.
Note: The difference between the Active roster and the Full roster is simply this: Only 13 players/companies can actually dress for games/trading while a Full roster comprised of 15 players/companies can be maintained to fit a specific investor’s needs. Keeping in mind that the Active roster limit of only 13 companies/players helps strengthen a concentrated portfolio by focusing allocations in higher confidence companies.
Generally, I maintain an Active roster portfolio of 13 companies and use the Full roster when I find a company that I am unsure whether I want to cut another player to make room for it - or - to simply keep the additional one or two companies on my radar. A current example of this is in process now:
I have both MDB and ZS on The Bench - but, am anticipating cutting both to add ENPH and AXON; however, as I continue to perform research and watch the various performances I have not been ready to move forward on the roster adjustments. Additionally, I currently have an Active roster - so, I could use the two additional spots to fill out a Full roster without going over my overall roster limits. Note that part of the value of having such general portfolio framework that limits portfolio numbers forces an investor to perform more research and places additional value on making such decisions. Here is the current roster:
A) STARTERS
- AEHR
- GLBE
- IOT
- MNDY
- TTD
B) The Bench
- NET
- CRWD
- SMCI
- MDB
10 ZS
C) Rookie Development Squad
- PLTR
- RELY
- PGY
All of which leads me to consideration of the 4-2-5 Defense used in football. The value of switching to the 4-2-5 is immediately apparent as it lops off two players/companies for roster purposes and which would place more allocation into fewer companies. This would be particularly effective in concentrating the 65-75% allocation for STARTERS and the 20% allocation for The Bench into just 6 companies/players rather than the 10 the Active roster now maintains. The downside to such a switch is also obvious in that the actual process/crucible for definitive/selective stock picking becomes more attentive/crucial and allows for less margin/room for error - which; is exactly why the 4-2-5 tends to be more effective in the passing game than against the running game. Its a sort of pick your poison in that if you are a superior stock picker then go for the 4-2-5 and customize as needed but if not - funds spread over a wider range/number of companies in the basketball team tradition provides at least some shade from the scorching sun of the market desert. Or something like that. If I went to the 4-2 it might look something like this:
A) Front Line
- AEHR
- GLBE
- IOT
- MNDY
B) Line Backers
- TTD
- NET or CRWD
C) Defensive Backs
7). NET or CRWD
8). SMCI
9). MDB
10 AXON
11 ENPH or ZS
That would eliminate RDS positions in PLTR, RELY, and PGY and place higher contracts/allocations in higher confidence companies. The 11th spot on the 4-2-5 would come down to ENPH or ZS and a legitimate argument could be made for either. Most likely ENPH wins that decision as it could be considered the most underrated company in the group.
So…what to do?
Now…to be sure, and with a plaintive investing demeanor… I am no great stock picker. I use a variety of trusted posters on The Fool combined with a marginally large number of subscription services to hone a lengthy list of potential roster additions into a manageable scope of research - and then add into the equation some really, really good “Wild A** Guessing” to arrive at some semblance of expectation and measurement for adding or eliminating potential roster companies.
So…while the 4-2 may be a wonderful portfolio management tool for those gifted in the art of superior stock picking - I suppose I’ll just have to stick with an Active basketball team roster for now; although, as noted above, that certainly doesn’t help with any definitive thinking on ENPH and AXON vs MDB and ZS - all good companies. Finally, the method I have been using has worked out fairly well and the question is simply why change - or- more succinctly, one could say, " If it ain’t broke don’t fix it".
But I might fix it just out of boredom on a sort of try out basis. Probably won’t - but still might.
All the Best,
BDH Investing