Winners and Losers in a concentrated Portfolio?

Investment Analysis Clubs Saul’s Investing Discussions
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Hi Everyone,

First time posting - I’ve been following this board for about a year and learning from everyone that contributes. Thanks to all for sharing on this board and keeping this an active and great community.

So. In following the mantra of adding to your winners and selling your losers, what do you do when everything is winning?

I have a very concentrated portfolio of only 9 stocks, I don’t have any excess cash that I am willing to invest so that means I must sell something to buy something. With such a condensed portfolio of stocks with everything that is winning - How do you determine what you should sell to buy that new stock?

For my style of investing - I like to let the winners run and also add to the winners. As a result - I don’t feel comfortable with selling anything! Especially with the ones that have done well like SQ which have more than doubled for my portfolio. I also have high conviction on everything I own, and I think they are all great companies so it is difficult to determine a ‘loser’ to sell and reinvest.

How do you all look at it? Does it make sense to value rank these on basically what comes down to short term future potential share gains of -1yr ?

My portfolio weights looks like this:

SQ 36.51%
PSTG 17.42%
ANET 11.27%
NTNX 8.73%
MSFT 8.32%
MTCH 4.97%
AYX 4.34%
PYPL 3.91%
SHOP 3.78%
Cash - 0.75%

Thanks for any insight.

Mercatorn

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My portfolio weights looks like this:

SQ 36.51%
PSTG 17.42%
ANET 11.27%
NTNX 8.73%
MSFT 8.32%
MTCH 4.97%
AYX 4.34%
PYPL 3.91%
SHOP 3.78%
Cash - 0.75%

Not sure your tax situation, but from those allocations, I would say you should definitely trim Square. I would suggest pairing that down to 25%, maybe down to about 18%. That is simply a massively outsized position on a percentage basis, unless this portfolio is only a small fraction of your total net worth and/or unless you plan to have fresh/new outside money to add to your portfolio looking into the future.

Your Pure Storage position may be a hair too high too, and possibly the Arista position but maybe not.

Note that I suggest this even though I hold long positions in both stocks.

-volfan84
long SQ with a roughly 5% position; short a July SQ $60 put position (opened TODAY for $1.29 per contract)
long PSTG with a roughly 9% position with July 20th call options included ($20, $25, & $30 strike prices)
long ANET, but have reduced from ~11.5% to 5.5% in recent weeks
long SHOP & AYX too

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Msft stands out like a sore thumb…

Can you see MSFT doubling or tripling in the next 3 to 5 years…? if not…replace it with TTD or TWLO…

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I love love SQ… but 36% if that represents the total of your entire port? Trimming that down would be the first thing I would address.

SQ is @ 10% for me

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I would trim SQ back to 20% or less and buy some TWLO, IMO.

JOHN

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I think Pure will do fine, but i dont see them as world beaters like most seem to. No question they are growing but other storage titans have come out with all flash optuons and are defending their turf.

I personally have much more faith that Nutanix stock over next 2-3 years will outperform anet and pstg.

It is a nice port though!

Dreamer

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No particular suggestions from me regarding what you might buy, but I’ll put in a contrarian view on your larger positions:

Assuming you are not already retired, I wouldn’t sell any of those larger positions just because they’re a large share. I say “So what!!!” SQ and ANET are both solid companies and I would have no worries about that allocation…(added assumption)…assuming you wouldn’t be upset/scared if they periodically drop… which they will and do. Both companies should do well for years. I should add that my own ANET allocation is larger than yours at 14.4% (mostly call options). My SQ is a 2.3% allocation (all call options).

PSTG doesn’t have that same strength, but they look pretty decent too. I own some…or rather, a number of call options. Allocation: 3.5% That position should grow quickly over the next year based on my expectations of the company performance.

I prefer a concentrated portfolio myself, but I can’t bring myself to make it happen given all the opportunities out there. LOL.

I should point this out too…I’m retired. Worried about the risk of high allocation AND options? I wouldn’t say “worried”, but I follow the market pretty closely. :wink: I don’t see an unacceptable level of risk (obviously) except for the possibility of sudden negative events: a quick financial meltdown, nuclear war, some other quick disaster. Could happen but I’m not losing sleep over it.

My top allocations:


ANET   14.4%  (mostly calls)
NVDA   12.6   (all calls)
TTD     9.3   (all stock)
NFLX    8.5   (all stock)
STMP    7.6   (all stock)
GOOG    5.7   (all calls)

I won’t go further than #6 because the #7 company will be partially/all sold soon (probably tomorrow) to load up on a few other companies I want to own or expand my allocations.

Side note: I short while ago, I noticed that GOOG was a bit on the cheap side, so I bought some calls. This position has been exploding in value and I expect my positions to more than double again. I like it because I view these positions as being relatively low risk. Yeah, they are just calls (and hence inherently risky), but the company economics are quick strong and the valuation is still modest.

Anyway, that’s my contrarian/outlier view of things. :slight_smile:

Rob
Rule Breaker / Market Pass Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

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Side note: I short while ago, I noticed that GOOG was a bit on the cheap side, so I bought some calls. This position has been exploding in value and I expect my positions to more than double again. I like it because I view these positions as being relatively low risk. Yeah, they are just calls (and hence inherently risky), but the company economics are quick strong and the valuation is still modest.

Rob, did you happen to read Tom Engle’s page post on Google in late May, with that playing into that decision? Had I not been on vacation that week, I might have done something very similar.

-volfan84

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"My portfolio weights looks like this:

SQ 36.51%
PSTG 17.42%
ANET 11.27%
NTNX 8.73%
MSFT 8.32%
MTCH 4.97%
AYX 4.34%
PYPL 3.91%
SHOP 3.78%
Cash - 0.75%

Thanks for any insight.

Mercatorn"

For me that’s easy. You are way too overweight in SQ. It’s a great company and is up over 70% this year but more than 2xs the next largest holding?

Rob

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Mercatorn, and others, ask the age old question: When to Buy or Sell? At what price? If there were a bulletproof answer, an algorithm to end all algorithms, we’d all be rich. Unfortunately, these decisions will always be a guessing game.

Here is what I do: every morning I Google “(Stock Symbol) technical analysis”. The first page that comes up almost always lists my favorite technical analysis sites. I know, I know, many here think that’s total hogwash. Not me. Given that the bulk of stock trades are driven by algos, I believe it’s prudent to understand the numbers that drive so many computer trades.

Let’s go through an example: Google “ENPH Technical Analysis”

The following sites are my personal favorites:

http://www.stockconsultant.com/consultnow/basicplus.cgi?symb…

Stock consultant is quirky. Its prognosis often varies from the conventional thinking, but when its assessment confirms the others, it’s MONEY! The site is good for analyzing breakouts.

https://swingtradebot.com/equities/ENPH

Swingtradebot is an easy to digest summary of major technical developments. It’ll assess short-, medium- and long-term trends. The basic chart offered is easy to understand.

https://www.tradingview.com/symbols/NASDAQ-ENPH/

As mentioned in another post, I really like trading view, probably because I like gauges and needles and good graphics. The first page gives the overall summary. If you click on “Technicals” you’ll find better granularity.

https://www.barchart.com/stocks/quotes/ENPH/opinion

Barchart is the bomb! The “Barchart Opinion” page is a no nonsense, in your face opinion. Over on the right is a “Support & Resistance” box. I can’t tell you how many times I’ve entered a limit order using a select price and have in come in right on the money. Me likes (right now, I have a limit order in place to sell a few more ENPH shares at $6.91).

I also really like the “Trader’s Cheat Sheet” tab listed on the left column. Here’s what it looks like:

https://www.barchart.com/stocks/quotes/ENPH/cheat-sheet

The beauty of it, it lists all past/present support and resistance levels that you can use to determine your preferred targets.

I typically run through a series of Google queries each morning. I review the current trading data for all companies that I seek to buy or sell on any given day. The more concentrated the portfoliuo, the less time this takes. I rarely find unanimous opinions but, heck, when everyone agrees I just go with it. More often than not, there’ll be divergent analyses. That’s what makes a market. It’s up to the investor to evaluate the situation. I generally go with a “preponderance of the evidence” approach.

So there you have it, my personal “Tricks of the Trade”.

Hope it’s helpful.

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Rob, did you happen to read Tom Engle’s page post on Google in late May, with that playing into that decision? Had I not been on vacation that week, I might have done something very similar. – volfan

Nope. What did he say?

I know he doesn’t like options.

Rob
Rule Breaker / Market Pass Home Fool & STMP/MTH Maintenance Coverage Fool
He is no fool who gives what he cannot keep to gain what he cannot lose.

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Nope. What did he say?

I know he doesn’t like options.

Looks like someone else started the thread, but Tom threw essentially a “page post” into the thread over on the Premium Commons.
http://discussion.fool.com/4056/goog-trade-candidate-33071232.as…

The gist was that Google at $1060 looked like quite a good deal.

I imagine that once my portfolio grows to sufficient size, I may start agreeing with Tom’s view and stop bothering with needing to worry so much about the timing aspect that is so key with options. I do like that Tom is not entirely averse to considering short term mispricings aa trading opportunities to exploit. Combining some of his ideas with some options has some nice potential for some shorter term trades at times.

-volfan84
Long the idea of having multiple tools in one’s investing toolbox…as long as they’re properly understood, with appropriate “investing PPE worn”

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mercatorn, if you didn’t have any Square now, and you had that 36% of your portfolio in cash, would you put it ALL in Square, or would you spread it out among square and some of your other winners?

Saul

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The post by mercatorn is a good example of why the convention I proposed a day or two ago would be useful. The question that immediately presents itself is ‘is it possible he really does mean he has an astonishingly reckless 36% of his global equity portfolio in one single company?’.

It would be helpful for posters to clarify. That could be done by showing you were using the convention by the prefix or suffix GEP. Thus mercatorn might say ‘I have GEP 36% in Square’ and we would all know at once exactly what he meant.

In this case, no doubt mercatorn really means something like Square is 36% of his four-stock payment-methods sub-portfolio, itself a small part of his overall portfolio, that’s obvious.

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Great replies everyone, I was surprised to find so many replies this morning! Once again, great community.

To shed some more light on my investor profile. I am 33, a father of a family of 4 and started investing two years ago. Before that time I had everything in the bank as cash. Since then, I now have a 401k with 12% of salary being contributed to. I also have an IRA that I max out every year. These are more conservative and are in funds that are ‘diversified’ in the more traditional sense.

My separate taxable stock portfolio is an enjoyable hobby of mine and I usually am able to spend about 2 hours everyday to follow companies and the economy. I do have cash in my bank that is enough for emergencies and several months of living expenses (my cash allocation in original post reflects cash equivalent in the stock portfolio). As a result, I do not feel at short term risk of needing cash which is contributing my aggressive investing style.

  1. Trimming Overweight SQ - Reducing to anywhere between 15-20%. This seemed to be the most popular suggestion

Why is it a good reason to trim an overweight position? Most of us are probably more tolerant of volatility and risk, especially the younger crowd like myself. Trimming as I understand it, is to take some gains off the table because you want to secure gains with the idea that you are protecting yourself from potential losses. In a way, this is like protecting from a stock price from dropping by -50% and not having the 5+ years for any sort of recovery. Does that seem likely?

I understand if you are near retirement but with my time horizon I don’t see any relevance to trim an overweight position. Say I had invested in Amazon 15 years ago and I was constantly trimming because it was overweight. Would that have been better for my portfolio overall or would I regret it? what are the chances I would be right in investing and distributing the gains from amazon among several other companies and being right on them too? In my perspective, this feels like taking away from a #1 winner, and putting money in companies that are likely in the beginnings of trying to prove itself out.

  1. MSFT - darrellquock pointed out this stuck out like a sore thumb. And he is right, this is probably a position I plan to hold MSFT until their cloud push reaches saturation and growth slows. I will then re-evaluate what their strategy is. Depending on how many years it will be, I might sell or maybe not.

  2. TMFBreakerRob - I like your contrarian view, thats how I think and feel about it, especially since I have more than 20 years until I would think about retiring. I guess I am searching for a reason to be convinced to sell overweight positions instead of the underweight positions that have not performed as well.

  3. Saul - Good Question. I would probably feel comfortable to put 30% back into SQ and re-allocate the rest. Maybe this is my answer?

  4. strelna - SQ is just under 30% if Im including everything so yes it is a very large portion.

Thanks again everyone,
Mercatorn

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Say I had invested in Amazon 15 years ago and I was constantly trimming because it was overweight. Would that have been better for my portfolio overall or would I regret it?
Of course the answer to that is dependent on what you would have bought with the proceeds from the Amazon sale. So unless you keep a very exact record you will never know.
Perhaps the biggest pro of keeping something for a long time is that dividends may grow until it becomes a cash cow , 20% +returns nearly guaranteed based on original price thus giving you some piece of mind in bear markets. And keeping something means only one decision , thus only one chance to make a big mistake, whereas buying series of replacements gives way more opportunity to really screw up.

I rank failing to hang on to some stocks like AMZN and NFLX as my biggest mistake in over 40 years as an active investor.

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My separate taxable stock portfolio is an enjoyable hobby of mine… As a result, I do not feel at short term risk of needing cash which is contributing my aggressive investing style.

My advice is that you should be clear on what gives you the enjoyment. If you are happy to call losses the price of entertainment then you’re fine, but if you have to come out ahead for the hobby to be acceptable then you should perhaps give a bit more weight to that and spread your risk a bit more. Be absolutely clear on what degree of losses make your hobby into a disaster and steer well clear of that. Note that making your family unhappy with you counts as a disaster.

Me, I enjoy the game and don’t mind much if I lose. So my portfolio consists of only two companies, Apple and Tesla, much of it in options. Very high risk. I’ve been retired for a while now, so this isn’t what anybody sane recommends, but I’m having fun (which keeps me happy) and making money (which keeps my wife from objecting to the time I’m spending on it).

Oh, I keep about a year of living expenses in cash on the side, and I have a 401K with about five times as much in Vanguard index funds. And a paid off house. The rest I play with.

One other caution – you’re very new to this to be doing risky things. I’ve been investing for thirty years or so, seriously for the past 22 years. I’ve made many mistakes and lost a ton of money to go along with making some. You haven’t had enough time to see very much or understand your own emotional reaction to serious losses. The dictum “know thyself” is absolutely critical to an investor; you have to know when you are likely to be making bad decisions and how to avoid that. So take care.

I hope you find this a useful perspective.

-IGU-

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Over the last four or five decades of active investing, I’ve played with stocks, bonds and currencies. They all haven’t been gems, but every now and then I’ve been lucky enough to have been in the right place at the right time doing the right thing and done pretty well. Anyway, I’ve always “picked” stocks rather than funds. One day I sat down and did the math. After a lifetime of paying taxes on capital gains and laughing at how well I’d done, I found out that, if I had never sold a share I had ever bought, I would have had a company go under and a couple tank badly, but I would have been far better off than all the trading. That said, I had loads of fun and adrenaline rushes that I would have missed :slight_smile:

Now it’s time to try something new to keep having fun and keep those adrenaline rushes coming.

The upcoming challenge is that the type of portfolio which is engendered in the discussions here require attention. Next week we leave for three months of wandering around in Europe. We come back home for a couple of weeks in September and then head off to Asia and Oz for three more months (coming back home in late December). As much of the time will be on ships where internet connectivity leaves something to be desired, the portfolio revision will be even more exciting.

I’ll lurk when possible, but probably won’t be posting much anywhere over the next half year as we enjoy what was left over after paying taxes.

Jeff

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Why is it a good reason to trim an overweight position? … Say I had invested in Amazon 15 years ago …

So you think SQ today is like AMZN 15 years ago? Amazon disrupted retail, dominated online, and then created a whole new industry (web services). If you see Square doing things of that impact and magnitude, then by all means, hold on it.

MSFT - darrellquock pointed out this stuck out like a sore thumb.

That’s what I would have said 5 years ago, and I was wrong. MSFT jumped into the cloud and is still being successful with Azure. Yeah, it’s #2 Avis to Amazon’s #1 Hertz, but still nice growth and profits. I think you’re correct to hold as long as the growth holds.

Overall, I go to this description of your situation:
I now have a 401k with 12% of salary being contributed to. I also have an IRA that I max out every year. These are more conservative … My separate taxable stock portfolio…

OK, so you’re pouring (too much) money into the 401K, and you max out an IRA, and then your third portfolio is the one in which you’re trading. And you’re young, so as long as you invest for the long term you’ll do fine. My problem with your setup, and it’s pretty minor as these things go, is that you’re putting too much into accounts that have RMDs and tax hits when you get older, and might be invested in things you might not want when you look back.

What I do today, and what I wished I had started longer ago was to not max out 401K contributions, but only to put into the 401K what my employer would match. For me today that’s up to 6% of my salary/bonus (up to Federal limits), because that’s matched 1:1 with immediate vesting. So it’s like I double my money invested instantly. The rest goes into my taxable portfolio where I trade freely.

The “conservative” word for your tax deferred accounts scares me. I’ve seen too 401Ks with lousy options, and heard about too many financial planners that put young people in what for them is stupid investments like bonds or other low growth opportunity funds because as a planner they don’t want to subject anyone to any risk. Of course, what they end up with is something that has almost no risk because it has almost no potential.

Getting a bit off-topic for this board, but Buffett recommends something like an S&P500 fund, and that’s not a bad way to go (https://www.fool.com/investing/2017/02/26/warren-buffett-jus… ), although there are a few recent articles pointing out the money that can leave money on the table: https://www.marketwatch.com/story/the-sp-500-index-is-not-yo… and . https://www.marketwatch.com/story/vanguard-thinks-its-own-em…

So, back to your point, given your 401K and IRA, I don’t think you should be too concerned about investing in high growth companies in your third portfolio. That said, I don’t think Square is a company for the ages, like Amazon was.

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One day I sat down and did the math. After a lifetime of paying taxes on capital gains and laughing at how well I’d done, I found out that, if I had never sold a share I had ever bought…

Yeah, I call that my “box of rocks index”. If I were as clever as a box of rocks and had just held on to all the AAPL I had in 2010 (my entire portfolio) and not done all that trading, how would I have done? It’s fairly complicated to figure what with taxes and dividends and money that would have to be withdrawn to live on, but I’m pretty sure I’m ahead at this point. Not by much though with AAPL near an all time high. Kind of sad, but as you point out the entertainment value and the adrenaline rushes are worth something!

-IGU-
(my records prior to 2010 aren’t good enough to make any guesses)