My story and a request- Long post

Investment Analysis Clubs Saul’s Investing Discussions
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Good evening all! Cross posting this to a few of my favorite boards. I must admit to my (mostly) lurker status on the boards to start with. For the past few years posting regularly has been a resolution that ends up broken. I apologize for that. While I don’t have the wisdom and experience of many on these boards I do have valuable experience, knowledge and temperament that would at least benefit some. I will do better. I promise.

Let me start by giving you the fast and dirty on myself. I grew up in a family that did its best to just scratch by. My parents were not well educated or taught to be ‘savers’. They did, however, place high value on the education of their twin sons (I’m a twin!!! At 10 it is cute, in middle age not-so-much) and set us up to do better than they had. I started investing during college with a 401k through Starbucks. The loss of the company stock upon my brash exit I try not to think about too much these days. Ahhh youth!! Anyway, years later my small IRA found itself entirely invested in an index fund (good) that was slowly being chipped away at through the quarterly fee (very bad) of the broker/dealer. My twin suggested I check out The Motley Fool. So I read articles, and I took notes, and I read some books and I read articles.

In 2006 I opened my first self directed account and rolled over my IRA and last 401k and made my first equity purchase and subscribed to my first premium service at The Fool: Income Investor. I was young, but the value focus and the compounding power of reinvested dividends made a lot of sense to me. And I had time on my side (sorta). I continued to fund my IRA and make purchases when I could and I continued to read and take notes….Buffet’s shareholder letters, some Graham, Greenblatt, Gardner/Gardner, even books on understanding financial statements, and lots of Fool articles and newsletters.

Then late 2007 came. And then March 2009. I watched the value get more than cut in half; but through a lot of good advice from the Fool community, some good listening and undoubtedly some luck my portfolio emerged from the recession in great shape. My knowledge, good temperament (in both life and investing) and experience were growing nicely.

In the fall of 2012 after getting way too excited about the teaser marketing of 3D printing and investing some in DDD I also purchased my first subscription to Stock Advisor. So for the last two and a half years I have slowly been learning to be more of a growth oriented investor and have very slowly been transforming my IRA as well, enjoying gains in DDD, BWLD, CMG, SWIR and TXRH I tend to allocate smaller. I can’t complain as my first time calculating my XIRR last fall showed a 12.4% annualized gain for my conservative portfolio since inception in 2006, beating the S&P by greater than 5% annually.
So let me take a moment express my gratitude to The Motley Fool, the brothers Gardner, analysts and contributors, and very much to the community on the boards that have helped to educate, shape and balance me. Not only have I begun a great investing experience, but I managed to pay off all my revolving debt this last fall and now feel a lot more positive about my financial future.

Thank you!!!

Now for a request for advice. As I am still in the process of changing my IRA to something that can grow a bit faster and feel I need to make some changes. I have a similarly sized 401k currently and it is filled with low cost index funds so I figure I will at least get about the average there. My concerns are the larger companies that I own and their ability to grow fast enough even over the long term. I know it is a bold goal, but for the next decade or so I would like to aim to grow it at about 20% annualized. If Buffett, Lynch and Pabrai can earn over 26% annually on large portfolios I should be able to do modestly well with my pittance. So here is where I spill my guts:
Current portfolio breakdown (sorry about the formatting):
Ticker/ %
ADP 7.22%
AWLCF 0.4
BWLD 8.85
CAMP 2.15
CDK 1.16
CLB 0.62
CMG 8.54
COST 5.76
DDD 0.63
DEO 7.01
DIS 2.87
FOOLX 0.97
INTC 7.8
INVN 2.69
KMI 3.14
LKIN 1.79
MAIN 1.52
MBLY 1.58
NFLX 1.28
NXPI 0.8
PCLN 2.08
PLAB 0.74
SCCO 5.62
SCTY 1.38
SILC 3.82
SWIR 4.4
TSLA 0.81
TSRH 2.85
TWTR 0.79
UA 2.01
ZAYO 0.89
Cash 7.81
A couple written calls and puts to create some income

My current ideas are to:
-Sell some/all of ADP , CDK and DEO
-Sell some of INTC and SCCO
-Possibly double the size of AWLCF , DIS, PCLN, NFLX, UA
-Buy a bit more KMI to bring it up to about 5%
-Expand small 3D printing holdings to include SSYS and more PRLB
-Possibly buy more TXRH (great price appreciation lately, and I think this concept, while not as sexy as CMG, definitely has a large addressable market)
-I have also been looking at possible purchases of CBOE, MA, UBNT, WAB, VEEV. I am still making my 2014 contributions and aim to have 2015 contributions made this spring.
-I know I shouldn’t have so much invested in the micro cap SILC (my most recent investing/allocation mistake) but I still have some faith in it
-Subscribe to Inside Value. Anyone have/enjoy/despise this service?

Any and all feedback is welcome from suggestions to scorn. I should add that I am currently not married, have no dependents and am about 25 years away from a planned ‘retirement slow down’

Thanks for reading.

Thad

PS I recently finally caught up on this board and am really enjoying it and appreciate a lot of the ideas here. Thank you to Saul and all the contributors!!

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Thad:

I think you have way too many stocks. It’s hard enough to find half a dozen that grew at 20%. You list 31. Keep the best ones. Dump the duds.

Denny Schlesinger

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Is there a board that specializes in this sort of thing - you list out your portfolio and situation and people chime in with improvement ideas? I’ve always been tempted to list mine out for feedback but felt like maybe it would be taking the board a little sideways. Maybe not though.

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In my opinion that is too many stocks. You can’t possibly keep track of them. It would be too many for me at least, and I do this full time.

You should consider replacing some with an ETF or two. I like RSP, which over time will probably outperform S&P 500. I also have some VBR on the basis that over a long period value and small stocks tend to outperform.

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Denny- How many total positions would YOU suggest?

I have 31, but most of them are very small and are really just observation positions. I would love to just dump the losers but the ones that appear to be ‘duds’ are all relatively new purchases that have had less than three quarters of earning since I purchased them. Every company has disappointing earnings now and then and if I just headed for the door I would just be another in the crowd.

Regards,

Thad

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Mauser96-

How many total would you suggest? What do you do full time, investor, advisor, analyst?

RSP and VBR do look like good ETFs. And the fees are totally reasonable.

Regards,

Thad

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You can’t beat ETF for cost efficiency . Avoid ETN. I use only index based ones because I am unable to predict sector out performance.

The point is that if you diversify excessively , you become close to an index. So you might as well buy a ready made one. Assuming you have half your equity funds in Index based ETF, and the rest invested into a dozen stocks, that would be less than 5 % at risk in each stock. OTOH having 0.01% invested in a stock is usually a waste of time , even if you get a 4 bagger the total amount of money is small.

There is literature out there showing the decreased returns of diversification after a certain point. Perhaps at your age with a steady non investment income you can afford more risk. and if you don’t use ETF you can own more stocks. But not as many as you have IMHO.

I further diversify by timing my ETF investments to avoid the worst half of bear markets, thus having strategic as well as tactical diversity.

It took time for me to learn the risks of dependence on one or two stocks, and on the wisdom of holding good companies through hard times that were unrelated to their business.

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Denny- How many total positions would YOU suggest?

There are no hard and fast rules. In any portfolio there is a tug of war between “efficiency” and “sturdiness.” The purpose of diversification is to spread or reduce company or industry specific risk. But the more you diversify the more you look like an index fund. If that’s your goal then you might as well buy the lowest cost index fund you can find. That will free up a lot of your time.

Since the existence of index funds the only reason for having a hand picked portfolio is to try to beat the index. You can’t do that by mimicking the index. Such a portfolio needs diversification to reduce risk. From what I have read, you only need about a dozen “diversified” positions. I stress “diversified” because 12 banks or 12 energy stocks is not diversification.

My portfolio swings between 10 and 20 positions and most of the time no position exceeds 20%. I have core positions and speculative positions. Core is mostly buy and hold. Speculative are companies or industries that I believe will strongly outperform the market in time, the equivalent of Lynch’s ten baggers.

The actual number depends on your time availability and attention span. The diversification should have some logic to it.

Denny Schlesinger

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Thanks for your reply!

Thad