Thoughts On Portfolio Management and Selling

Investment Analysis Clubs Saul’s Investing Discussions
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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. :slight_smile: ?

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!

Justin

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Shoot, I forgot about the table formatting (and, like an idiot, previewing my message).

Company A           Company B
6.4% of total	    4.8% of total
18.2% of stocks	    13.6% of stocks
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JustinFields,

I would focus on the companies more, your view of how they will fair from this point forward then the percentage of your portfolio.

Of 45 companies, NFLX is 13.46%, NGG is 5.19% and MO is 3rd at 4.16%. All have been trimmed at various times but I have also added back to them when prices pull back. Some days, NFLX will turn a losing day into a winner and vice versa. I am Ok with it.

I know there is not a single solution. It really gets back to how you feel about the investments, your timeline and the risk.

Gene
All holdings and some stats on my profile page
http://my.fool.com/profile/gdett2/info.aspx

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Justin,

I have been going thru trimming a lot of my portfolio to get it a little more focused, so I went thru and still going thru some of same dilemma you are.

Personally, I don’t have a problem with any single position being the size of those you mentioned. Of course that is a very general statement and w need to take everything into account.

What seems to be working for me is first going thru each company and looking at financials. This pared out ones that were not generating revenue and/or slow growing EPS.

Then I looked at my “bubble” companies and re-examined my reason for buying and tried to adjust each one individually thinking “Would I buy at todays valuation?” and “How much would I buy if so”. Along with what other opportunities are there for adding/buying.

It made decisions a lot easier for me. To reference your post, “I don’t think they have the same potential” along with both being in China. To me, that is what you need to think about individually and decide if there are better places to put that $ to work and size those two accordingly.

Hope that gives you one way to look at it.

Kevin

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I’ve been appreciative lurker for quite awhile here.

Hi Justin,
Welcome to the board. Feel free to post more often.

Thought you’d like to know that you won a MF Post of the Day with your very first post on the board!!! I had thought we were through for March but they put up one more yesterday and it was yours! (That’s NOT an April Fool’s joke, by the way.)

As far as your question, I think you have already answered your own question.

You have 50 companies but 32% of all your value in just two of them.
They are both internet companies which seems too concentrated to you.
They are both in China, which makes you a little uneasy (as well it should in a country where the government can totally change Internet rules tomorrow if they get the urge).
You think that they are past the stage of explosive growth at this point.
(And the economy of China is slowing down as well).

You’ve got all the right ideas.

Best,

Saul

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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.

Hi Justin,

One of the things I learned while going through the CFA program was a bit about portfolio management and how investors and managers should be looking at things.

A common issue is to compartmentalize things into tiers or buckets. For instance, holdings meant to support retirement, holdings meant to pay for college, holdings meant to pay for vacations or a future house, and so on.

Viewing money that way is very convenient, but it ignores one paramount fact. Money if fungible. In other words, the source of the funds makes no difference at all. If an investment in one bucket does very well, part of it can be sold to pay for another bucket’s needs when that bucket doesn’t perform as desired. Looking at the portfolio overall, it is doing well and it’s time to use grab money to use for that other need. Who cares if it comes from the “wrong” bucket?

Would you delay using the money when needed because the “proper” bucket hadn’t worked out as hoped? Of course not, because it’s silly to maintain that view. “Gee, I’m sorry honey. You can’t go to college this year because the investments paying for that didn’t work out. The good news is that our 2-week vacation camping in the woods out back is changing to a 6-week tour of the U.S. and Canada in a brand new motor home!”

In other words, view your portfolio as a whole. Your 401(k), your IRAs, your taxable account, and so on. Therefore, I suggest viewing a position size relative to that, not to the account it happens to be in.

Cheers,
Jim

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Welcome to the board. Feel free to post more often.

Thought you’d like to know that you won a MF Post of the Day with your very first post on the board!!! I had thought we were through for March but they put up one more yesterday and it was yours! (That’s NOT an April Fool’s joke, by the way.)

Thanks for the welcome. Glad I could tack on to your count, though that obviously wasn’t a focus.

As far as your question, I think you have already answered your own question.

Partially. That is why I’m coming back around for follow-ups.

You have 50 companies but 32% of all your value in just two of them.

Yes. My gut is telling me that is too much, for these two particular companies. It would vary greatly depending on which companies had the highest weighting. For example, if the two were Berkshire Hathaway and PepsiCo or something, it would be totally different. (Big and low volatility companies). But how do you determine the upper limit? What factors go into your decision?

They are both internet companies which seems too concentrated to you.
They are both in China, which makes you a little uneasy (as well it should in a country where the government can totally change Internet rules tomorrow if they get the urge).

I also own other Internet companies, which isn’t the big deal. As you noted, it is the combination of Internet and China.

You think that they are past the stage of explosive growth at this point.
(And the economy of China is slowing down as well).

I’m fine to have a good portion of my portfolio in companies past explosive grown phase. They are less risky, which factors into the overall picture.

Shifting back a bit…

I’ve seen lots of descriptions of different buying methodologies and related terminologies.

  • Buying in thirds
  • Speculative position
  • Full position
  • Overweight position
  • Dollar-cost averaging

I’ve been around investing for a fair while, and TMF since dialup AOL, so I understand the ideas, and what they mean to me. Some of them are clearer than others in application. How do you (all) divide up your portfolio and categorize your holdings? When do you hit a point where you stop buying a company you like, because you have enough of it, and what triggers that decision?

I rarely buy a big chunk (full position) of a company to hold at once. But I don’t stick to a rigid mathematical system (like buying in thirds) either. I buy a little piece and follow news on the company. If it continues executing its plan well, I may buy a bit more, whether the stock has gone up or down. That could happen a number of times. If it gets tagged as a “Best Buy Now”, I would probably buy a bit more based on the external validation. The buying continues sporadically until I hit a vague point where I simply stop buying and let it grow naturally as long as it continues performing well. The riskier I see the stock, or the more crowded my portfolio is with similar companies (by varied criteria), the lower the undefined point where I stop buying.

Getting into a stock isn’t hard. I’m also pretty tolerant of volatility, when the company is doing well overall. If a stock thesis proves to be wrong, I have no problems or qualms selling. Where I have dithered is when the company’s situation is good, but starts bumping into portfolio-related constraints.

Due to their weighting and the similarities (Chinese, Internet, slowing growth), I’ve come to the conclusion that it is time to prune back on Baidu and Ctrip. But I’m looking for what type of process you folks use to establish when you have enough or too much. When you figure too much, how do you define where you scale back to?

I know there is no single answer to these questions, nor any one that is definitively the “correct” answer. I’m more surveying, looking for a range of people’s personal interpretations and answers, so I can formulate and fine-tune my pruning, selling and allocation methods.

Thanks!

Justin

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Jim,

Thanks for commenting.

I do look at the overall portfolio as a whole. For example, I like to have a bit of real estate related investment. There is none at all in my individual stock holdings, because that preference is met by one of the 401k funds.

The fund options in the 401k are pretty crummy. The best of the bunch tend to extremely diversified mid to large cap. The worst of them are target-date funds that mix bonds with funds-of-funds and multiple layers of fees and management. So I’m forced to make some decisions based on the particular constraints of the fund bucket, which are beyond my power to change.

But knowing those constraints, I still try to get the overall, full-portfolio balance I want by using the self-selected stocks to provide small-cap and micro-cap exposure. Or simply choosing stocks with Foolish characteristics that I think will outperform my fund options. I accept higher risk, knowing I have the lower risk already handled.

To answer your questions, I wouldn’t delay using money because it wasn’t in a specific bucket. Nor would I splurge because one bucket was doing particularly well. As you noted, it is money, and fungible.

I listed the percentages as of the two stocks as parts of the stocks, and overall; simply for reference. My view of my portfolio contains the sum of all the pieces, and I manage across them, even if I have to deal with the segmentation and bucket attributes due to the types of accounts.

Thanks for the input! I do get your point.

Justin

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Thought you’d like to know that you won a MF Post of the Day with your very first post on the board!!!..

Thanks for the welcome. Glad I could tack on to your count…

Hi again Justin, a little but important point: it’s our count, not my count. All the people who contribute to the board is what makes it what it is. And the rest of the board always has many more Posts of the Day than I do.
Best,
Saul

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But how do you determine the upper limit? What factors go into your decision?

But I’m looking for what type of process you folks use to establish when you have enough or too much. When you figure too much, how do you define where you scale back to?

For me at least, this is more an art than a science. I want 100% of my positions to adhere to the “science” (“science” meaning the numbers – good balance sheet, good growth, good value). But my allocations are skewed toward the stocks I feel have the most current upside potential and the least current downside risk. I have a higher percentage in the stocks I feel strongly about. If the percentage “feels” too high, I trim it a bit. The only process is, asking myself how confident I am in each holding, and if it merits the percentage I have allocated to it.

How do you (all) divide up your portfolio and categorize your holdings? When do you hit a point where you stop buying a company you like, because you have enough of it, and what triggers that decision?

Your mutual funds are a (how big?) part of your portfolio you can’t really control. So I’ll just address the individual stocks. If you’re just going to continue to do the MF thing and buy small positions in 50+, maybe eventually hundreds of companies, just hoping you hit the next NFLX or AMZN in its infancy, well that’s one way to play it. I don’t honestly know how or why you’d sell off anything if you don’t know much about the company. Judging by MF standards, how do you know if it’s Amazon in 2005 or Amazon today? And is Amazon today even expensive? Your best bet might be to systematically trim positions (maybe each quarter?) to no more than X% of your portfolio.

Personally I would advocate investing in 10-15 companies you actually care enough about to really dig deep on. It’s more fun, and you actually have a chance to beat the market (or lose to the market, of course). I’ll say for my part that my 20ish positions are already just about too many for me, and I feel like I spend way more time than I should on this already. (But much of my time is spent diving into companies I’m not yet invested in.)

Point is, I believe you should have a high conviction about all your stocks. If you’re just buying companies you’re not too familiar with it’s kind of like throwing darts.

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I know there is no single answer to these questions, nor any one that is definitively the “correct” answer. I’m more surveying, looking for a range of people’s personal interpretations and answers, so I can formulate and fine-tune my pruning, selling and allocation methods.

Allocation is one of those things that I’m pretty sure I need to apply, but I’m never sure how much is enough. Since we can’t know how any particular sector (or country) is going to progress, there is no choice other than to take an educated guess at it based on what we know. Hopefully, the more you know, the better your guesses. No guarantees tho!

I also struggle more with sell decisions than with buys. I guess I don’t want to stop the winning streak or lock in the losses. But at what point does a stock go from performing adequately to crossing the “my money would be better off elsewhere” line? As you pointed out, the advisers at HG and RB don’t seem to have a handle on it either.

I don’t use hard and fast rules for what to sell or when, but here’s a few things I consider:

  1. If hoping for a turnaround is all that’s left, its a prime candidate.
  2. If the long term chart (you pick how long) is flat or declining, take a closer look (SAM? WGO? BID?)
  3. If the entire sector is in the doldrums (Oil?), will you make more by switching horses or waiting it out? Never a clear call.
  4. You already mentioned too much concentration in a sector, but “internet” is too broad to be confining to me. I’d worry if I had all travel related companies or all search engines. Personally, I’m wonder what’s stopping the same problems that CMG is experiencing from hitting other chains like BWLD, BJRI, or CHUY

Good luck in your search for the answer!

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I know my answer will be different than Saul’s, but I think for everyone it comes down to some math based on the answers to two questions:

How much would a big decline in that stock hurt you, and how likely is that big decline? aka likelihood of risk and tolerance of risk.

Bob, starting with $0 in his investment account, and $1000 to invest a month, might but 100% of their first month’s investment into a single stock. Why not? Even if it declines significantly there’s going to be 11 more $1,000 picks in the next year.

Carol might be an expert in a mobile handsets. She might invest a large portion of her portfolio in Skyworks because she knows the market so well that she feels like she understands that market better than even the analysts do.

So those are the questions you have to ask yourself. What are the chances of a 40% drop in Baidu’s price? It certainly wouldn’t be surprising. Currency, economics, fraud, government action, there are any number of reasons we could see a big decline in Baidu. (That’s not to say it’s not a good stock, merely pointing out risks.) But if Baidu is 6.4% of your portfolio, a 40% drop in Baidu is only a 1.3% drop in your overall portfolio. If you are still relatively young that might not be a big deal.

Personally, I operate under the rule of thumb that I want no stock to be more than 5% of my portfolio. Ideally 3% or less. That’s my risk limit on a stock that I research on the internet. That said, I had 60% of my portfolio in Apple in late 2011. I just felt that I knew that stock so well. I was aware of how “out on a limb” I was, if the CFO turned out to be crooked, for example. But given how much I knew about AAPL I was willing to take and tolerate that risk. I still have 5%-10% in AAPL today, but the risks are higher and and my tolerance is lower, so I’ve been drawing it down.

So how confident are you in these stocks and how willing are you to take those risks. Some will advise not selling until you have something better to do with the money, but I say you can always park the money in an index fund if you don’t have any better ideas.

–CH

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Hey Justin !

Just to ease your mind a little (MAYBE), I own well over 50 companies and two of them, yes two (2), make up 23% of my stock port. However, as you have alluded to, those two are solid, well established, long time companies that pay a fair dividend and I have no intention of cutting back on them … yet. I, personally, do not put much value in having a maximum percent for owning any company. If it does well, is growing, has no problems in any area, then I just let it keep going and growing. I’ve owned both of those companies for over 30 years, so they are proven companies to me.

Good luck and keep asking questions.

Rich (haywool)

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Apple was one of my first individual stocks somewhere around 2003. I was in college and didn’t have much money. It was probably not even a tiny position for most on the board. It doubled or tripled, and I trimmed my position because it was over 50% of my portfolio. Then it grew more, and I trimmed some more. Not because I thought whatever other stocks I would buy were better investments (they weren’t). Or because I needed the money or couldn’t afford to lose it (I only used money I knew I could afford to lose). I sold because what I read online told me that a stock shouldn’t be 50% of your portfolio. It was nice that Apple helped me build a diversified portfolio. Unfortunately, I diversified from one great company into several average ones.

As long as I am still working, have an emergency fund, and expect to continue adding to my portfolio, I’m not going to worry about what percentage a great company makes up in my portfolio. I’ll trim or sell out of my position when I think something is overvalued or too risky, or if I need the money, or if I have a great idea that I think will be a better investment. But not because the stock performed too well.

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Paul,

Mutual funds in the 401k are 65% of my total portfolio. So that is a big diversified lump my portfolio is dragging along. I haven’t quite left my job just so I could move the funds into the Rollover IRA, but I’ve half-jokingly thought about it. When I do switch jobs, I’ll dump the funds.

“Do the MF thing” is ambiguous, but I get what you mean. The newsletter products have endlessly growing lists of recommendations. They seldom simply say “We were wrong about this company. Sell.” Letting things go to the point where you have the subscribers vote on which stocks to bail on comes across to me as a gigantic cop-out, despite their saying they retain the right not to jettison the crowd pick. It seems to show that the don’t have a grasp on the very process I’m looking to improve on for myself. And if their only answers are to upsell me to more expensive subscriptions or their TMF-managed accounts, no thanks.

I’ve been on TMF (whether using paid services or just lurking) for about 22 years. (Scary to think of that!) If I’d been buying and keeping even a handful of companies each year, I’d have 100+. I do sell. Selling out of something I think has changed is far easier than simply taking profit or reducing ownership of a winner.

I do know a lot about many of my stocks, particularly my larger positions. I wouldn’t say I’m throwing darts. But I’m also realistic enough to know that I don’t put the same level of time and attention in to them that someone like Saul does. His theoretical (and actual) returns are higher than mine. It isn’t ignorant vs knowledgeable, but a continuous spectrum. I’m just acknowledging that there are posters, particularly on this board, that follow their concentrated portfolios more than I do my broader one.

When I travel, I don’t give a thought to my portfolio. If it goes completely unmonitored for a couple months, I don’t sweat it. If my two largest stock holdings went all the way to zero simultaneously, I’d take a cumulative hit of 11.4% of my portfolio. I wouldn’t like it, but I’d live with it. And that 11.4% number is what I’m currently looking to lower. When I was in grad school, my portfolio ended up like a Ronco rotisserie: “Set it and forget it”. That is something that a concentrated and monitored portfolio would be hard pressed to accomplish, but I know I pay for that in percentage points of return. I am aware of the tradeoffs I’m making.

An example of something that pushes up my stock count is Saul’s portfolio. As a learning experience with real money to have it be meaningful, I bought them all, just in small amounts. Combined, they are half the weight I have in Ctrip alone. I almost view it as tuition, as I follow along and learn. I don’t hold Saul responsible for the performance, but I read this board a lot to learn about the reasoning that goes into the choices and monthly changes. I find the level of explanation, analysis and perseverance better here than in many of the paid write-ups. Whether I agree or disagree, it prompts me to think.

Thanks for responding. In trying to articulate my answer to you, it also prompts more thought helps me incorporate additional ideas.

Justin

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Justin:

Great question!

I like Peter Lynch’s approach which comes down to “sell when the story changes.” That needs to be tempered by overall portfolio management where too much concentration goes up against “watering the weeds and cutting the flowers.” So it’s a delicate balance but IMO following the story is paramount. Just so you know something about my style, I like to keep the portfolio to no more than a dozen stocks and on one occasion I let a Chinese stock make up 50% of my portfolio (Over a period of almost four and a half years it had an internal rate of return of 43%. I closed the position at about 45% below the top price).

I’ve looked at both Baidu and Ctrip and never bought them. These fast growers tend to create “S” curves in the price chart. The “S” curve is typical of how growth occurs not just in stocks but in many things in nature. Typically the stock will remain flat to rising modestly until there is a 15% market penetrations. Then “pragmatists” get on board creating the “curve in the hockey stick.” When market penetration reaches around 85% the top of the “S” curve is put in. The overall chart is typically divided into three equal lengths, the first 15%, the middle fast growth, the rest of the story. This Microsoft chart only shows the last two thirds:

http://invest.kleinnet.com/bmw1/stats30/MSFT.html

here you see the “S” curve better distorted by the tech bubble (encrypted link but safe)

http://st26.net/ezv0y5

Disregarding portfolio allocation the first thing I would do is to see how far along in market penetration the technologies Baidu and Ctrip depend on are. Once you are past 60 to 70% you should start trimming. The logic is simple. Mr. Market pays for growth expanding the P/E ratio. When growth slows the P/E contracts. You want to be out when P/E contraction starts.

Portfolio allocation is a different matter and it’s as varied as there are investors. Your’s seems to mimic Peter Lynch’s some core positions taking up a big chunk and a “long tail.” Lynch used to have a long tail of small positions he thought were ten bagger material which is exactly what you did with Baidu and Ctrip. If they have fulfilled their job maybe it’s time to start cutting back some. Don’t fall in love with stocks, they won’t love you back. They don’t even know you exist! :wink:

Denny Schlesinger

PS: I own st26.net

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I do know a lot about many of my stocks, particularly my larger positions. I wouldn’t say I’m throwing darts.
It isn’t ignorant vs knowledgeable, but a continuous spectrum.

Maybe you do, but that’s exactly my point – you probably know more about the larger positions. Seems like you should focus on what you’re good at. I’ve learned that for me, for each stock I own I need to put in several hours of reading/studying once a quarter when the Q reports come out (at the very least), in addition to watching the stock price almost daily. That’s bare minimum. I am just getting to the point where I’ve done that for most of the stocks I own, and I’ve been spending time on it every day for months now. I don’t think knowing 50 stocks that well would be possible unless it’s your full time job.

I’m just getting to that point, because I’m learning (through Saul’s board) that you can get a lot more accurate idea of a company and its stock than I ever had before, even though I was reading extensively on the MF and elsewhere. What I hadn’t put together was that you have to look at what the company is saying in its reports about how fast it intends to grow, and then look at the P/E of the stock, and do a little math. I was already picking decent companies…the “dartboard” part was that I didn’t really understand what I was paying for them. Sure, I could look for “growing” companies with reasonable P/E’s, but Saul had a far more refined method for quantifying that growth and value.

I agree, you definitely sound like you’re further down the “spectrum” of understanding companies and stocks than most passive investors, but you simply can’t keep up with 50 stocks well enough to really find the good ones, especially with the level of interest you expressed. If you disagree with that, I encourage you to examine what percentage of your stocks are beating the market.

I suggested you should focus on fewer stocks, because I believe that’s the only way you can hope to beat the market. And if you’re not trying to beat the market, what is your goal?

-Bear

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And if you’re not trying to beat the market, what is your goal?

Well, as Saul has said many times, the goal is not beating some index, but performing well enough to take out the income one wants. If the S&P were to go into a period of 20% a year gains, would you really care if you equaled the index if you were managing 15% a year growth? Likewise, if the index were to go into a period of 2% gains, would it be good enough that you were getting 3%?

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you simply can’t keep up with 50 stocks well enough to really find the good ones,

One needs some diversification for safety. Unfortunately most of the articles I’ve seen on the subject don’t look at diversification from a safety point of view but to see how closely a random portfolio tracks an index. You find texts like the following:

How Many Stocks Does It Take?

Most importantly, Table 1 indicates that even a portfolio of 100 stocks will deviate from its target index by an average of 1.13% per month for the equal-weighted approach and 0.60% per month for the value-weighted approach.

http://www.aaii.com/journal/article/how-many-stocks-do-you-n…

So what? We are not managing index funds. The risk we are trying to minimize is of serious loss. Several authors I trust have written that 10 to 20 stocks in diverse industries is sufficient for safety. Charlie Munger says that diversification is used to hide incompetence or something like that. I like a concentrated portfolio because it’s easier to manage and has a better chance of giving better returns than a diversified one. It also depends on the amount of capital you own. If you have more than plenty then it makes sense to play it safe, diversify a lot, and sleep well at night. If you have less capital and it needs to produce higher returns then large diversification is not helpful. You need to run a bit higher risk to get the higher yield.

Denny Schlesinger

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This is very interesting conversation and I am learning.

I want to point out David Gardners’ rule breaking podcast (it’s an excellent source of reemphasizing learnings on the site as well).

David in his latest mailbag podcast answers a similar question - when to sell. I recommend listening through March mailbag till the last question. Here is quick summary of what I got out of it but it won’t replace listening directly.

  1. Sell / reduce when you have large position and can’t sleep easily, This apply more to winners, hopefully. This would be trimming to the point you feel comfortable
  2. Sell when it’s clea the thesis gone wrong
  3. To sell losers who aren’t necessarily broken thesis - make it a tax decision - generally late in the year when you have booked profit…

But most importantly (this is my summary of David’s input and my own thoughts)
4. Make it a priority decision - which other stock or company is more attractive to you at that time and you have to pull out of an existing position. That’s when you decide what do you want to reduce risk on or take tax break on.

I have sold too early and too late many times… And I am sure I am not alone… However, if you make decision based on any one of the criteria above, I feel that over a number of such decisions, you start seeing the benefit of the process. I am hoping to stick to this going forward.

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