One function of currencies is that they serve as a store of wealth, and this function relates to this post. Currencies that are illiquid are not that useful, and this aspects also relates to this post. Some people (traders) buy and sell currencies because they speculate that the relative value of one currency compared to another will go up or down. It’s a zero sum game but for some it’s also a way to hedge (so it has some utility irrespective of the zero sum game). All this would be really OT to this board, but that’s not what I’m posting about.
Saul is usually 100% invested at all times so by definition he lacks the cash (US dollars) that is the store of wealth needed to buy any more stocks or increase any of his current holdings. The interest rate on holding cash is so low that it doesn’t even cover the deterioration due to inflation.
So let’s get to it. When one is fully invested and one does not want to take on leverage, the only way to buy a new stock or add to an existing position is to sell some or all of another position in the portfolio. In this situation, one is forced to make a choice is stock A better than stock B. Another example is to say “I really, really like stock A right now, and I want to increase my allocation”. Well, there’s no cash so I can look at stocks B-H and decide if I want to trade any of those to buy more of stock A. In other words, I can think of each of my stocks as a different kind of currency.
For example, after GTC, I was amazed by all of NVDA’s announcements and the pace at which they were introducing products, building their ecosystem, and positioning themselves to capture new markets. My confidence in the company’s future increased. When I saw the stock drop as part of a general market selloff and fears of delays in autonomous car introductions, I saw this as an opportunity to increase my allocation. I did look at my NVDA allocation and concluded that it was a bit lower than I wanted. No cash was in my portfolio so I had to look to the other stocks (currencies). Which one would I sell and why? I liked them all. Which allocation could I reduce? I liked all the allocations. Dilemma. There was no obvious choice so next I had to consider if I thought that NVDA would rebound before some of the others. The real question was which of my stocks did I think would increase (percentage-wise) more slowly than NVDA. My stocks to choose from were NTNX, ANET, AYX, SHOP, SQ, PSRG, TLND, and NKTR. To make this assessment I also looked to each company’s 52 week high and the percentage below it was. I considered the chance that some news might cause the shares to appreciate in a short time (I eliminated NKTR as an exchange vehicle candidate because it could have a big announcement at any time and because it’s my smallest position; I wanted to maintain my exposure to it). I ended up cutting loose a big chunk of my TLND shares. Why that one? 1) It was not off of the 52 week high by that much compared to the others. 2) In my experience, big selloffs in the past did not affect TLND so much. I suspect that this is because it is not as widely traded and not part of the MOMO group (I assume) so when people want to raise cash during a general market selloff they don’t sell TLND to raise cash. 3) I have several other companies in the same or similar category to what TLND does (big data); these include NTNX and AYX.
I usually don’t treat my companies as currencies because I think it’s usually hard to make the call on which company will increase its stock price sooner or faster. But sometimes there are situations that seem kind of obvious to me and that’s when I might do a trade-in. If NVDA does what I think relative to TLND then I might trade it back later. Or not. We will see if and when that time comes…
Chris