Letting Winners Run and Portfolio Concentration

When do you trim your winners, if at all? Is there a concentration level that you’re uncomfortable with? Does confidence level increase your ability to use Charlie Munger’s “sit on your ass” investing approach when watching your winners continue to win?

One of the conundrums we all seem to have is how/when to let our winners run and to what level of risk we are comfortable with when positions start to reach large percentages of our overall portfolio. For some, a 5% position is terrifying. For others, 40% is big…but not too big to scare them into selling. Fascinating stuff.

I was doing a rearview mirror review this morning on past sales of one of my top holdings(AYX)and only then did I realize that if I hadn’t trimmed a few times this year, AYX would be over 36% of my portfolio. That’s when I stopped to really ask myself, what is my threshold for portfolio concentration? If the walls came tumbling down, how much would I want invested in a single company? SPOILER ALERT - I didn’t come up with an answer.

Billions of dollars have been made or lost depending on your side of the trade tickets when people have let winners run or cut them for fear of concentration risk. Netflix comes to mind. I remember keenly after the Quickster debacle how proud I was of myself for buying near the bottom and then “winning” with some nominal double digit gain a short time later. Ha! We all have those stories. Now, those NFLX shares wouldn’t have been life altering money, but it would be worth six-figures today.

We all have those stories and they are just as valuable for future investing as they are entertaining to remember.

Of the many valuable pieces of this board, the way in which so many of you share your portfolio concentrations is a personal favorite of mine. It’s not so much about WHAT you own that interests me, but more how you’ve come up with your own allocations (systematic, rules-based, gut-feel, etc). And how varied you all are in your comfort level and confidence levels.

Rising tides lift all boats…and you’ve certainly all helped me more than you know.

And since I’ve never really shared my portfolio, as of 10am this morning I am invested in the following material positions:

AYX 16.6%
TWLO 16.3%
ZS 15.6%
TTD 15.0%
MDB 9.7%
OKTA 8.6%
CRWD 2.8%
IDXX 2.5%
ESTC 2.2%
SMAR 1.6%

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I am wondering about this too.

I am in a similar boat with my top three positions having grown to outsized portions. I have 23 stocks and my top ten are:

AYX 15.5%
SHOP 12.3%
TTD 9.8%
TWLO 6%
OKTA 5%
MDB 4.7%
SPLK 4.15%
ZS 4.12%
HUBS 3.58%
ESTC 3.44%

The top three have just kept growing and I only trimmed SHOP a tiny bit.

Dave

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At the risk of this being OT for this board (but still fun!)…

First, the ETFs:

QLD 51.8% (Held since late 2013 when it was maybe 20% of all my investments. 336% gain and various additions have ballooned it to more than half all my holdings - and I have no immediate plans to trim. Added 100 more shares to it twice this year.)

SPY 15.7% - my “safety net”

PAYC 9.1%
TTD 6.2%
OKTA 5%
TWLO 4.8%
AYX 2.6%
MDB 1.3%
ZS 1.3%
ZM 0.8%
TSLA 0.4%

I try not to let any single position get more than 10%. I have owned PAYC longest on this list, and both its performance and its percentage reflect that. That being stated, if it were to go over 10%, I would not feel a need to reduce - I would just increase my awareness of the risk - and hope that the increased performance of others would keep it in perspective and percentage.

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The high expense ratio on QLD, .95% currently, has kept me away from buying that ETF for years. You were smart and ignored that.

But we’ve managed to do well outside of indexes over those years.

GordonsGecko writes:
Billions of dollars have been made or lost depending on your side of the trade tickets when people have let winners run or cut them for fear of concentration risk.

I would think that given your MF handle, you’d consider that “Greed is Good” and wouldn’t be afraid of letting your winners run. ;^)

Seriously, though, I think some/many here believe that percentage of portfolio isn’t as big a risk as holding onto a stock whose company isn’t doing as well as it was.

For instance, 7 or so weeks ago, many here were trimming/selling out of SHOP not based on concentration, but on slowing growth, and not just less growth but the deceleration was itself increasing! Yet, here we are not two months later and SHOP is up about 30% since that thread (and more since some did their selling).

Right or wrong outcome, the discussion was a good one - it wasn’t that “I’ve got too much SHOP and need to sell,” it was “SHOP isn’t growing as much as its stock multiple demands and that’s probably due to cannabis speculation and they’re doing some desperate marketing, so I’m moving on to greener and less risky pastures.”

I don’t think most here have a hard and fast concentration threshold. If you hold 7-9 stocks then it wouldn’t be surprising to have multiple stocks over 10% of your portfolio. Maybe you start thinking about when a stock is pushing 20%, but that wouldn’t by itself be a reason for me to sell. I’ve had a third of my portfolio in a single stock, and that worked out really really well. That’s the outlier, though.

Anyway, I’d use portfolio concentration as an indicator for digging more deeply into a company’s future, but not as the primary motivation to sell. After all, it could be that 6 of your 9 stocks are doing poorly so you should sell your winners, but trim your losers and find future winners.

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Right or wrong outcome, the discussion was a good one - it wasn’t that “I’ve got too much SHOP and need to sell,” it was “SHOP isn’t growing as much as its stock multiple demands and that’s probably due to cannabis speculation and they’re doing some desperate marketing, so I’m moving on to greener and less risky pastures.”

I actually really disagree with this. It wasn’t a good quality discussion at all. It was completely wrong.

The reality is neither the fundamentals nor the share price performance has anything to do with marijuana - as they came out and told us Shopify has the 3rd largest GMV in N America behind Amazon and eBay and nothing to do with marijuana. As revealed on release the sales growth decline was not accelerating but decelerating resulting in a shallown glide path in the high 40%s.

That is why the stock took off and why the board discussion was wrong.

Ant

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That is why the stock took off and why the board discussion was wrong.

As I stated, I wasn’t talking about the outcome of the discussion, but the type of discussion. It wasn’t a portfolio concentration discussion, it was growth and future business discussion.

And, at least the last post in the thread was pretty darn spot on.

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I understand what you mean which was the discussion was on topic.

I also think you’ve got a really smart point about what constitutes a bigger risk and the value of the resulting intervention:- portfolio concentration and balancing risk vs the risk of holding a deteriorating stock and cutting out poor performers early.

The Shopify discussion was not just wrong in terms of outcome but poor quality and wrong as a discussion I believe because it fundamentally wasn’t calibrating growth effectively let alone correctly and introduced supposition and speculation surrounding analyst and market levels of speculation and hubris about a topic (marijuana) that was just simply board originated FUD.

A

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I think the SHOP discussion is being mischaracterized. Saul was bothered by the slowing growth and concerned whether that slowing growth was buoyed by the marijuana component, but would have been concerned about the slowing growth relative to other opportunities. That SHOP has continued to grow, for now, is beside the point. One could easily be more comfortable in other companies. And, those other companies could well have done better than SHOP. If SHOP is up 100% from here a year from now, one could say this was a bad call, but regardless I can’t fault the reasoning, especially with other good choices available.

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One of the factors an investor needs to consider especially in holding stocks like these, in this time, is, “how crowded is the trade?”

There’s already been a whiff of “risk-off” in ZS’ price behavior the last couple of weeks. Reminiscent of past “darlings of the growth market”. If for some reason they don’t beat & raise handily, or growth is more than 5% off expectations, it’s a crowded trade and there would be an inordinate dumping of shares & price drop.

Conversely, if they crush estimates and growth projections, at their already elevated market cap is there a mirror-like move up? Or because it is so heavily owned already by hedgies and growth/factor/tech/momentum/whatever ETFs would it be a more minor move?

Combine that assessment with how much of one’s portfolio that stock makes up… and the future regret one will have over a perceived loss from these levels, which will be greater than the future happiness one will have over an equal gain from these levels…

We all wish we’d held on to MSFT, AMZN, AAPL, NFLX since they went public, but it’s unrealistic to expect it of ourselves psychologically when they’ve all had 80-90% drawdowns at some point. FWIW I pick a number like 8-10% drawdown expected for most stocks, double it for these and consider selling when they’ve dropped 15-20% from their highs. If it’s between earnings reports, a lot of it is just noise, but some of it is true insider info-driven.

Is ZS really “worth” 58% more than it was in mid-January? Who knows - there is some “greater fool” element in owning these low/zero earnings high growth stocks.

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Defies my logic. To me it is less risky to own 75% of a rare winner than 100 so so companies.

No, you don’t buy and hold blindly but I just see more risk aversion is quality not quantity. As such I only sell my winners when the story changes for some reason or I need the $$$s for something compelling.

I sold all of my winners in early 2018 as it was time. That included Nvidia and ANET. Fortunately at their peaks. Mongo and Alteryx were not bad transfers.

So yes sell! But why sell a winner when nothing has changed? Tinker logic I guess.

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