You are correct on both counts. TMF encourages Fools to build up an initial portfolio of at least 15-25 positions to achieve a minimal level of diversification. The only limit to how many positions should be in your portfolio is your personal comfort level. I have over 140 positions, most of which I am letting do their thing without micromanagement over the next 3-5 years (or longer).
TMF also teaches that at any time, you can expect 60% of your positions to beat the market, and 10% to drive 90% of your gains. The problem is, you never know which positions will fall into what categories, and the cast of characters is constantly changing. Today’s mediocre performer could be tomorrow’s high flyer. That’s another argument for a larger portfolio - casting a wide net improves the chances of holding a company right when they experience a growth spurt.
I’m not a fan of “cut the weeds” investing, and I’ve let more than one position wither away just in case they rebounded and lit a rocket. And some of those companies have caught fire and rewarded my patience. Others have not (yet). I am reminded I can only lose my cost, but the sky’s the limit on growth.
Remember, conviction in TMF is not based on expectations for market performance but for business growth performance over the next 3-5 years (or longer). So even if the market price is down, if the business is still operating well, Foolish analysts will likely remain bullish on the future of the company. They don’t live in the market moment but invest in the company’s future. And just because a position is small in your portfolio does not mean it does not have the potential to become a big piece of your future wealth.
When and how to sell is one of the hardest questions to answer, and there’s no single, fits-all-investors answer. Given TMF’s embrace of long term buy-and-hold investing, Sell recommendations are usually few and far between, not because the analysts want to hold a recommendation past its expiration date, but because they want to make sure it is the right and rational decision to do so. Most often, simple market movement is not a sufficient reason for a Sell recommendation. But sometimes, you have a need to not wait for your service advisors.
Generally speaking, Fools don’t sell for an under-performing market price nor do they take profits for profits sake. A disappointing position could find its legs, and Fools are encouraged to let their winners run. This year’s 1-bagger could be tomorrow’s 5-bagger, 10-bagger or more. Many a Fool has regretted selling a position too early because they focused on price performance and not business performance.
Just because a company’s price is high does not mean it cannot go higher. Or that today’s 52-week high won’t turn out to be tomorrow’s 52-week low. Most people think they need to sell high out of a fear of that the market price won’t go higher, but Fools do not invest in market performance but rather in the business performance of the company. And because TMF encourages long term (3-5 years or longer) buy-and-hold investing, Sell recommendations are few and far between.
The trick to investing without a lot of money is to start off small, setting aside a little cash each week, each pay period, each month. Most of us think we need more cash than we actually do - and will spend more because we have it. This is one of the reasons 401k plans work so well - they ensure that portfolios receive a consistent influx of cash. Being able to adopt a disciplined approach to consistently saving money to invest is essential to a long and successful investing journey.
For me, if the investment thesis no longer remains intact, that’s a good reason to sell, but if the business is performing operationally but that just isn’t being recognized by the market, I might tend to be patient and give it more time. Or, if a strong performer reaches 10% of my total portfolio, I’ll trim it as a matter of fact because I don’t want my portfolio to become too concentrated in a single position. In the absence of one of those two events, I tend to hold for the long term, even if, or maybe especially if, the company has grown consistently over time.
Ideally, Fools have an idea when they would sell before they open a position, but a company’s road can have many twists and turns. Fools try to not make emotional decisions, but that can be difficult when you’ve given a company every opportunity to fulfill its promise - you hate to give up on it but you’re tired of being burned by it. Or it’s been a tireless performer and you hate to limit its potential.
Here’s a great Fool School article discussing selling:
Investing works best when you are continually building up your portfolio, whether you add new positions or add more to existing positions. Portfolios that receive a single cash infusion and are left to grow will always underperform portfolios that receive a steady flow of new fuel. Many Fools will trim an overly successful position to generate additional cash for fresh investment opportunities, especially if it has become so large a percentage of your portfolio that it presents a risk to be mitigated. Think of it as taking a cutting from a big beautiful flower and planting it in the hope of growing a second big beautiful flower. My preference, however, is to find ways to add cash to a portfolio rather than re-purpose it.
Bottom line, I recommend not over thinking it. One strategy would be to create a Sell Watch List, dividing your companies into 4 groups. The first group is No Way In Sell Do I Part. These are the companies in which you have the highest conviction and would not want to sell even if the earth was coming to an end. The second group is It Would Really Bum Me Out To Sell. These are companies in which you have strong conviction but it wouldn’t make you question your faith in all things Foolish if you did.
Then the third group is It’s Not Like I’m Married To This Company, investments in which you have a positive conviction in their future potential but you wouldn’t lose any sleep if they weren’t in your portfolio. And finally the fourth group, What Was I Thinking?, includes those companies in which you have the least conviction or cannot remember what they do or why you opened positions in them.
Then, once you have your portfolio organized, you take the last group and rank each company in order of highest conviction to lowest conviction. Then you start liquidating from the bottom of the list. Easy peasy, right?
Who is on the edge of his keyboard wondering what your second question was…
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