Skinnying the portfolio - a little nervous

Investment Analysis Clubs Saul’s Investing Discussions
1

I am selling off some things to skinny the portfolio, from 20-something stocks, now down to 23 stocks. OK, not a huge move but it’s something.

One thing I am struggling with is taking bigger positions in the stocks I own. I can do this. I like the stocks I own, and I don’t want to keep a huge ton of cash, some, but not a ton.

I have identified a few other stocks I could sell, getting me into the high teens. This is where I think I want to be.

The hard thing though is feeling like I will have large sums of money in single stocks. Right now my biggest position is $27k, and that feels like a lot. If our port was around $500, I’m not sure that I could have 10 stocks of $50k each, it feels like a ton of money in each holding. 20 stock at $25k each? It’s still scary. Perhaps I don’t feel confident enough with knowing about each company.

Any advice?
Karen

2

Hi Karen,

I track my holdings as a percentage of my entire portfolio and stopped looking dollar amounts. For example, I know Visa (V) accounts for 3.7% of my portfolio and I don’t follow the dollar amount. Thinking in terms of percentages also helps me track when I have too much of my portfolio in one or two stocks. Plus, the decisions should be the same when following percentages regardless of the dollar amount of the portfolio.

Wiseguy

2 Likes
3

Karen,

This brings up a question I had on your post. I have most of my holdings in s brokerage account. Are you dealing with a similar situation or do you have most of your holdings in IRA’s and the like? I would also like to shore up my portfolio but am worried about the tax implications.

A.D.

4

Karen,
Those of us with a large number of companies who are learning things on this board all find we have a resistance to selling down to a smaller total count of holdings. Assuming that you reinvest the proceeds from selling out a position, your total invested capital doesn’t change, only the allocation changes.

I won’t call it “advice” that’s sort of a loaded term, let’s just call it some thoughts based on own experience. And remember, what I’ve got to say aren’t laws like gravity, they’re notional heuristics.

You might feel like having over $XXX invested in a company is just too much. But based on the numbers you provided, let me assure that it’s not a ton of money as far as the market is concerned. Take a look at the market cap for your largest holding and figure out you’re percentage of it. You’re in the teeny-tiny range - so am I. I’d venture even Saul with his 300 x gain on his portfolio is also in this same range with his largest position. You are not going to move the needle on any of your holdings no matter what you do.

First thing is remember that you invest more than money in a position. You invest time - your time, as an older person I am all too aware that this is the most valuable asset I’ve got, and once spent, it is irretrievably gone forever.

I’ve found that it takes close to the same amount of time to stay informed about a company I’m invested in irrespective of how big the company is or how much I’ve got invested in it. OK, some companies generate more press than others, so you need to pick and choose what you’re going to read. For example, I ignore almost all the drivel posted on Seeking Alpha. Whenever you see an article titled “Company XYZ Should …” you can be very confident that you have not missed something important when you elect not to read the author’s opinion about what the management of a given company should do. Somehow I find it really hard to imagine Tim Cook (or any CEO) perusing SA in order to figure out what he should do.

But aside from filtering what you’re going to pay attention to, the most important filter is to limit the number of positions you’ve got. If you hold less than a 3% position in any company that you do not intend to build into a larger position, sell it. Reinvest the funds into a position your building.

The harder calls are the 3% - 10% positions. You’re going to want to keep some of these, but which ones?

I’ve sold some fairly large position of companies I really liked that had performed quite well. SBUX for example, I had about 7% of my portfolio in SBUX, I had accumulated this position over a few years. Altogether SBUX was up about 50% for me. But when I asked myself why I had such a large position, the answers I came up with were things like:

  1. The stock price had gone up faster than the market, I felt like it would continue (momentum theory of investing).
  2. I live in the Seattle area, I like to invest in companies headquartered in the Northwest.
  3. Howard Schultz (CEO) seems like really good guy. He treats his employees with respect, pays them pretty well and seems trustworthy.
  4. I’ve owned SBUX longer than most of my holdings (this is a variant of the buy-and-hold philosophy).
  5. TMF recommends and seems to really like this company. I subscribe to some TMF services because I think they provide good recommendations.
  6. I personally like the product. And more importantly, so do a lot of other people - every time I go to a Starbucks store either here or in China the place is crowded and I have to stand in line.
  7. Etc . . .

These aren’t all bad reasons to invest in a company, but they’re just not sufficient. You might have noticed there are no financial reasons in that list. If I continued and provided more of my reasons for being invested in SBUX that omission would still be evident.

When I looked at it with a green eyeshade, SBUX didn’t look so great. They sport a PE in the mid 30s - that’s tolerable if there’s strong growth to support it, but SBUX has a 12 month TTM earnings growth of around 16%. They have a Saul percentage (1YPEG) of 2.23% (ouch!).

It felt a little like a divorce: I love you but . . . er, um . . . well honestly, I find some other companies more attractive, I won’t forget the good times we had together. I can’t say you treated me badly. But, but . . . (with a tear in my eye), but I have to move on. It’s over.

20 Likes
5

Karen, I don’t pay any attention to dollar amounts – just percentages. And while having 10% in a single company might seem like a lot, that also means that 90% of your assets aren’t in that company. That’s how I look at it, anyway.

Neil

1 Like
6

Hi Karen, I have to agree with Wiseguy and Neil. I think entirely in terms of percentages of my portfolio, and never in terms of how many dollars.

I have to admit that when I started out that that had been an issue. Years ago I used to think I wouldn’t want something to get to be more than X dollars, but as the portfolio grew, that became outdated, and now I am not even aware of how many dollars I have in each position without looking it up.

Saul

2 Likes
7

You know, these are the greatest answers. I often hesitate when I’m going to post a question like this to the boards – like, well this is a dumb question talking about my emotions (usually fears) as they relate to my portfolio. But then when I ask them, I get the best answers!!! It’s very helpful. 90% in other things, yes, that helps.

Thanks everybody for the replies and hand holding. :slight_smile: I keep a spreadsheet where I have the dollar amounts and the % amounts next to each other.

Brittlerock, you are so right about time! Time! And, you know I would like to be able to remember all the stocks I own and be able to recite the list without forgetting any (that may mean cutting even further…)

Karen

1 Like
8

I keep a spreadsheet where I have the dollar amounts and the % amounts next to each other.

Hi Karen. I use the free Morningstar spreadsheet to keep up with my stuff. It allows you to keep up with alot of different things and arrange the view just about however you want. My very first column after company name is portfolio weight.

Also, you can log in numerous portfolio buys and sells with different dates and dollar amounts.

If you are interested, you may want to check it out: www.morningstar.com

Take care.

Jeb
You can see all my holdings here: http://my.fool.com/profile/TMFJebbo/info.aspx

2 Likes
9

And, you know I would like to be able to remember all the stocks I own and be able to recite the list without forgetting any (that may mean cutting even further…)

Karen, If you look at your list of stocks and you see one or two sets of stock symbols where you can make a good guess at the company name, but you can’t remember exactly what it does, much less why you bought it… you’ve got waaay too many positions.

Saul

:wink:

2 Likes
10

No I want to remember all 15 or 20 of them without looking at any list at all. :slight_smile:

11

I tried to re create my list from memory while running an errand. The ones I forgot – Disney, Gilead and Facebook, gah!

12

Karen:

There are two schools of thought: diversify for safety or concentrate for performance. I’m not a statistician but I’ve heard that 12 stocks is more than plenty for diversification (provided the stocks are not all concentrated in one industry*).

The second consideration is that the larger the portfolio is the less need you have for yield and the more need you have for capital preservation. As the portfolio grows you diversify a bit more.

The third consideration is the time you spend on the portfolio, the more stocks the harder it is to remember them all and the more time you have to spend on it.

The next and possibly the most important consideration is the distribution of capital in the portfolio. Wealth has a Pareto or power law distribution also called a 20/80 distribution. This means that, left alone, 20% of your stocks will be worth 80% of the portfolio. That’s where the 1% and the 99% come from, the extremes of a Pareto distribution. Peter Lynch says not to cut your flowers and water your weeds. If you follow this advice then your best stocks will grow a lot. Your decision will be how far to let them grow, 20%, 30%, 50% of your portfolio? I recently let KNDI grow to 50% but later started to take profits and finally sold the whole lot. You have to decide on your level of comfort.

Cash is also a position. Think how much you wish to have to protect the portfolio and to take advantage of opportunities. As I sold KNDI I bought some stocks but held on to a lot of cash because I think that finally a correction to the longish bull is in the works. Only time will tell.

Anyway, these are some thought that might help guide your thinking about diversification/concentration. BTW, Charlie Munger likes a concentrated portfolio. If you buy enough stocks you might as well buy an index fund instead and spend your time doing something else. This is a very personal choice.

Denny Schlesinger

  • I own three rare earth stocks and count them as one for these purposes. You can think of it as diversification within the industry group.
25 Likes
13

Karen,
I struggle with this a bit as well.

One there are tax implications for trimming some positions that have grown over the years. I still think they will grow, but the valuation is higher than I would like.

The other issues is the sheer dollars in some positions, particularly when I think of reallocating money now into them from selling smaller ones I don’t want to invest in anymore.

Lately I think of it this way, a 10% drawdown on a position that is 10% of my portfolio is only a 1% drawdown of my total wealth. I can set alerts on those positions if the price drops to review more closely, or as an opportunity to buy more, as I did with SWKS today when it went under 100.

So in short, even with a bigger position, think of what a loss on the position would do to your whole portfolio. With stocks like these, it is likely you would realize the thesis for the investment has changed before an individual position was too far down.

2 Likes
14

What counts in returns is the whole portfolio returns.

But unless you are very smart/lucky (statistically it’s hard to tell them apart) you are going to have some losers. The losers can only go down to zero , whereas the winners can be multi baggers.

For them to become multi baggers you have to resist selling just because you have a profit. Is the story and the earnings picture intact? Are you allowing for your ownership bias and price anchoring?
Has the company and stock become an everyday word ?

TSLA is an example. I own TSLA for the long run, bought at lower prices. Everybody has heard of Tesla. But what can I add to present informed knowledge? Not much , so I am not buying more. At these prices at least. I would buy more under the right circumstances. The battery fires were an example. Pure luck allowed clustering of these, driving down TSLA price, , but how was a battery non-expert to know?

Tesla
http://www.cnet.com/videos/top-5-best-cars-of-2015-mid-year/…
Tesla P85D “close to perfect”, outscored every other car by a wide margin.
If they can bring anything close to this degree of excellence to the $35,000+ Gen 3 they will sell like hotcakes. Electric cars are just better, ask anybody who owns a good one. Since they are better, price is what is holding back mainstream use. Some unknown amount of this possibility of booming Gen 3 sales is included in the present TSLA price.

The opposite would be the case with AMAVF (Arcam) Also held for the long term but not at a profit. There is substantial public misunderstandings about this company, so I was willing to add more recent lows. For those interested in Arcam look on investorshub.com for a very thoughtful bunch of posts. Also look at a considerable number of posts a while back on New Paradigm Investing on MF (skip through the politics, start working backwards from mid April)

The key to Arcam is that jet aircraft are so advanced and mature (new jets are no faster than ones from 30 or 40 years ago) that the major way to make them more efficient is to make them lighter. Arcam allows that because complexity of parts is free with 3DP but very expensive with machining. I expect 20 + % growth in sales way into the future, and they are profitable now.

Other than these and a large holding of RSP, mechanically timed,some GILD and some MIDD , my stocks aren’t much different from the Saul Stocks list.

Sketchers has done great, I still don’t understand why it was so underpriced a few months back. Without this board I would never have even looked at it, not being into women’s fashion. So Thanks.

I also own a some Wells Fargo preferred as an income source. I am not much into income or dividends since I regard Social Security as a sort of annuity.

2 Likes
15

Denny,

I recently let KNDI grow to 50% but later started to take profits and finally sold the whole lot. You have to decide on your level of comfort.

I always enjoy reading your posts. I’m trying to figure out what level of comfort I’d have with 50% of my portfolio in KNDI. Solitary confinement and water boarding spring to mind…

I’d need some serious meds to deal with that anxiety.

You have some strong conviction my friend.

Regards,
A.J.

3 Likes
16

You have some strong conviction my friend.

A.J.

You have to consider that my cost basis was around $1.15 when the stock reached $21.60 on July 21, 2014.

http://softwaretimes.com/pics/kndi-06-10-2015.gif

I reached my maximum share count on March 18, 2013 at an average cost basis of $3.06. The stock took off two and a half months later and I saw no reason to “cut the flowers.” But lowering the cost basis is always the order of the day. By September 11, 2014 I had lowered my cost basis to $2.10 by selling covered calls and by trading a few shares.

By late March 2015 the news started to deteriorate and the stock had fallen to $12 and change. Time to change tactics. Time to take profits. Time to diversify. And this, I believe, is the useful lesson. Don’t rebalance the portfolio just because the numbers say so. Consider each position individually: buy, hold or sell? Then act accordingly.

On the other hand, whenever there us a steep spike in the stock price, it might be a good time to take profits. The problem is that they are easier seen in hindsight than live. At the time my estimate of KNDI was too rosy to take profits by selling and instead I contented myself with selling covered calls. Again the consideration of an individual stock’s prospects.

Denny Schlesinger

1 Like
17

Coming to this a bit late, but good discussion, Karen.

Brittlerock:

You might feel like having over $XXX invested in a company is just too much.

Agreed! Once, a $500 position was a big “chunk” and now my portfolio fluctuates many times that amount on a daily basis. But on a % basis, not too much really.

I am still wrapping my head around position size as well, especially in terms of %, as with the run of things the last few years, those set dollar amounts are a smaller and smaller percentage of the port.

thanks to Saul and all who contribute here, as I have come across this board and it has given lots to think about it.

Brittle - interesting on SBUX, I have had it since the 08 nadir, and it is up tremendously, but may need to cull it, for the reasons you mentioned…love the green visor comment.

Brian