Portfolio management Question

To Saul and all concentrated portfolio holders:

what do you do on a day that a 15% holding drop by 20% and the other few stocks (e.g. 9 or 10) do not compensate much for that drop? You find yourself several percentage point down when the market is up. Do you start thinking that maybe it was not such a good idea to have put so much in one stock? or you remain confident that this is just a temporary situation you can ride through?

you can have some confidence about the business but you never know what all the others will do, and they can take out 20% on the smallest things that come to their mind. This is especially true when a portfolio is composed of so many ‘highly valued’ or ‘extended?’ stocks. yet as long as nothing too bad come into their mind, you might do very well assuming you have excellent businesses. Something will pop in their/our mind. It is just a matter of time… and the narrative can sway down or up?

tj

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what do you do on a day that a 15% holding drop by 20% and the other few stocks (e.g. 9 or 10) do not compensate much for that drop?

Depends on the reason for the 20% drop. What I do is analyze the business and make a decision from there. In the case of Arista, I’m holding. It had grown to my largest position and quickly, so I’m not terribly concerned about it. But don’t kid yourself, I had to do a decent amount of work in making that decision, but that was because of some ambiguity in the call, and it is work I generally enjoy.

There is a reason these businesses are valued highly and that can cause volatility, but the key is the underlying business. Do you still want to be in it?

A.J.

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Like Tinker said… look at girls in bikinis, not daily stock fluctuations.

By your questions, it sounds like you’re expecting daily affirmation from stock prices. My portfolio doesn’t always go up, and doesn’t mirror the overall market. Pick names that you personally have conviction in, and lean on your conviction ( or re-evaluate it ) when a bump comes your way.

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“What I do is analyze the business and make a decision from there.”

sure isn’t what we all do to here? we are looking at the same news feeds and at the same numbers. Some may understand the information better than others and there are different interpretations. But don’t we all look over our shoulders at each other looking for some sort of validations of our decisions? I am talking about that. Many decisions that led to the financial crisis were made by thoughtful people. It is just the outcome we don’t like and we have to make stories in retrospects to calm ourselves.

In the case of Arista, I am riding it. I have been riding it for more than 3 years now and I know what I am in for. From where I sit, it looks good.

tj

There’s no simple answer to your question. The action one takes needs to be considered based on the situation at hand.

First, put things in perspective. Yesterday I was up about 19% for the year - my annual goal is 20% per year, so as of the close yesterday after about 6 weeks, I was 1% shy of my annual goal. Today (or more accurately last night after the close) my portfolio was up just shy of 16% for the year. So yeah, Arista took a dive and Arista was one of my largest holdings, but really, the damage was not all that bad.

Next, why did one particularly large holding take a dive? Did a factory burn down? Did the CEO get killed in a car accident? Did some competitor (who?) suddenly mop the floor with them over the last quarter? Anything truly dire with respect to the future of the company? In this situation, the answer can be confidently answered, “no.”

So what actually happened? The performance for the last quarter was great, again. Oh, the forecast was down for the next quarter. OK, so how do the perform historically going from 4th to 1st quarter, also down, so the traditional pattern is just being confirmed.

How about the coming year? Here’s where things get a bit more interesting. I like to look at products as well as financials. I won’t go through the whole CC, but at one point Ms. Ullal (CEO) said, “I expect robust growth to continue ahead in 2018, together with our entry into 400 gigabit Ethernet next year. We also delivered many powerful software innovations in containerization, data analyzers, and our hybrid any cloud offering with Amazon, Microsoft Google, Oracle and Equinix, to name a few. Coupled with meaningful traction of CloudVision, we see this as an emerging software category for us in a couple of years.”</> So we see upgrades and new products being offered that cater to the trends of more speed and bandwidth requirements driven by ever increasing data volumes. She also said, “In terms of new products, December 2017, Arista unveiled its next generation of cloud grade routing. Arista EOS version 4.20 with FlexRoute, delivers transformative routing and automation. And with that, we can now address a myriad of peering use cases across cloud, content delivery, and internet exchanges.” Kind of puts the Cisco legal stuff in the rear view mirror if it wasn’t already there.

But, Ms. Brennan (CFO)was the bearer of some bad news, after reporting glowing results for Q4 she said, “we will face some tough comparables for year over year revenue growth as we move through 2018. And with this in mind, I would reiterate Jayshree’s comments from last quarter with respect to top line growth moderating to a more typical mid 20s for the year.” She went to give some information on margins and how certain items would be reported in the future, but that mid 20s item was the bombshell after Ms. Ullal had just reported “45.8% annual sales growth” for 2017.

And bingo, you get a sell-off and the stock drops by more than 17%.

If you’ve been reading this board you will notice mixed reactions. Saul bought more after hours and then sold it this morning (position was already too large). Others bought, others did nothing, others trimmed. I don’t recall reading about anyone who panicked and sold the position, but of course, not everyone reports how they reacted to the news. I imagine a number of folks looked at their holdings and are still wondering about what the hell happened.

Personally, I tried to buy after hours, but I had to sell something first (I don’t use margin). I couldn’t close a sale so I waited. I sold some LGIH this morning and used the proceeds to buy ANET at about $253. And yes, even with the drop that puts my ANET holdings at over 15%, right at the top edge of my comfort zone.

I expect ANET to recover a fair amount of that loss fairly soon, but it may take a couple of quarters before the "mid 20s forecast is forgotten (the market is forward looking, it doesn’t have a very good short term memory). I don’t expect to hold this large position too long. I will trim as the stock recovers. Of course, I could be wrong. But even if so, IMO ANET remains a premier company it’s still a solid long term investment.

In retrospect, the one thing I’d do differently is possibly put some of those dollars into LEAPs. I very seldom use options, but this looks like a really solid case for them. I might still do that by selling some ANET and using the money to buy the options. It’s not too late, yet.

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I have to get into the habit of using the preview button.

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