Hello Saul’s Board.
I’m looking to stir up a conversation on portfolio composition/asset allocation, and the folks on this board seem to be willing to engage in more thought than average. I’ve been appreciative lurker for quite awhile here.
My dilemma is one of good fortune. Two companies whose stocks I’ve held for quite awhile have done well. The stocks have appreciated nicely. I still like them, so it isn’t an issue of getting rid of companies I no longer like or trust. But I’m getting leery of the weight they make up in my portfolio.
Like most people, I have a 401k with my job. Sadly, my options in it are only mutual funds, most of which I dislike. But I pick the best I can and deal with it. I also have Roth & Rollover IRA’s. They contain almost completely individual stocks, including both ones I’m discussing. The weight of the two companies are shown below, out of my total investment portfolio, and as a percentage of stocks I can directly control.
Company A Company B
6.4% of total 4.8% of total
18.2% of stocks 13.6% of stocks
I know each person’s tolerance for high portfolio weighting varies, along with the definition of what that even means. I’m looking at what factors go into that, other than a simple yet non-quantifiable feeling. Unlike Saul, I tend to keep a portfolio with a lot of companies.
Currently, that is about 50, ranging from the heavyweights above to tiny speculative positions of only .1% of total. I know that runs counter to the idea of a concentrated, carefully-watched portfolio. Yes, I have money in my “50th best idea”, as opposed to keeping it all the top few. However, history has shown me that I’m not great in knowing which ideas will be the best ones ahead of time. The two big positions started out as about .5%-1% of the stock portfolio each. I liked the prospects, dipped a toe in for a tiny buy, then simply held on because I saw no particular reason at any point to sell.
It isn’t that I’m unwilling to sell stocks I own. Many companies in the Rule Breaker and Stock Advisor realms passed through my portfolio at one point or another. When the prospects of a company changed substantially for the worse, I bailed out. That damned Warren Buffet also keeps buying companies I own, giving me a tidy profit on a long-held investment, but robbing me future appreciation. Jerk. ?
Anyway, adding to the dilemma on the two stocks is that they are in the same sector and country. Combined, they are 11.2% of my total and 31.9% of my stocks. Some of the minor queasiness is that the country is China and the sector is Internet. Companies A and B are Baidu and Ctrip, respectively. I’ve held through all the market gyrations of the last 10+ years.
Although I still like both companies, I don’t think they have the same potential for dramatic gain that they did a decade ago. Their very success and size work against them in that now. For the first time, I’m giving genuine consideration to selling a portion of these winners.
This type of portfolio management issue is one that neither Rule Breakers nor Stock Advisor really deal with in a meaningful way. Unless something goes earth-shatteringly wrong, they tend to just leave all the recommendations as active. Duds become statistically insignificant and the big winners run indefinitely on paper without any profit-taking. After all, it is a newsletter, not an actual portfolio.
I know there is no single “right” answer, but I’m looking for feedback on how you all go through your decision-making process. What is the maximum you have in an industry or country (or, in this case, both)? How or when do you decide to prune back a successful investment, reallocating some to new ideas and maybe smaller companies?
This is Saul’s board, and I have a good sense of his approach, from reading the knowledgebase. It has worked for him and I wouldn’t consider disparaging it. I tend to keep a larger number of stocks and don’t know the intricate details of them the way he does. Perhaps the former somewhat compensates for the latter, although it does push down the theoretical return. The extension of the big-portfolio approach ends up being or mimicking the overall market, rather than outperforming it. I understand that.
I also know that Saul isn’t interested in Chinese companies, which have become my two largest individual holdings. Some of the discomfort he may feel about them (without speaking for him) might be part of why I’m looking to trim now, despite having done well. I also watched the MF Global Gains fiasco. I never put in more than tiny initial investments as part of an (overly?) broad portfolio, and the fruits of some of those ideas did pan out, even if a small minority.
So, I welcome thoughts on the family of issues relating to allocation, rebalancing, selling pieces of winners, etc. Even if I don’t invest exactly like the tenets of this board, I do respect the experience and thoughtfulness of its readers. Thank you!