Blank sheet of paper

Here’s a question. I know some hedge fund managers supposedly liked to start each year by rebuilding their portfolio from scratch. Clearly this isn’t practical from a turnover perspective but conceptually there may be something to the idea of thinking about what size a position should be in your portfolio of you were buying it anew today, rather than simply letting things drift. There’s also the idea of completion for capital - do people agree that it’s sensible to be ready to sell a position any time we think we’ve found a better alternative? The discipline here is to try to ensure you buy well in the first place making it hard to space existing positions, but the point is you should be equally disciplined in terms of being ruthless about dumping a weak idea for a better one. Thoughts?

Hi

For me, it may depend on your sleep tolerance. Some positions get too large and then need top slicing so I can get some zzzzzz. Don’t underestimate the importance of zzzzzz ! :slight_smile:

Going the other way, on the down escalator, I don’t sell losers based on price action, but I would look at roce and gross margin to see if this is being eroded and whether the management’s allocation of capital is up to scratch!

An investors allocation of portfolio capital is the essence of investing imo so, yes, if there is a better idea I would reallocate.

(Personally, I don’t think hedge fund managers are a good role model for many aspects of life, but maybe they don’t like me also!).

Good luck!

Ben

Hi Steve I like the blank sheet of paper idea and realise I kind of run my portfolios this way. I score the shares I own and determine the ideal portfolio allocation from the score. It’s not quite as simple as the example I am about to give but let’s say the maximum score is 10, and a particular share scores 9 and a share’s score is also its ideal percentage holding size. In this case the ideal size of the holding is 9% of the total portfolio size. I also have a minimum trade size to stop me trading every time a share moves a little above or below the ideal size. Let’s say the minimum trade size is 3% of the portfolio, then I can hold between 6% and 12% of the total value of the portfolio in this particular share. If the holding goes below 6% my spreadsheet encourages me to buy, and if it goes above 12% my spreadsheet encourages me to sell some shares.

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Richard, having followed you for a couple of years, there don’t seem to be many occasions where you sell or lose faith in a stock. Is your process really as rigorous as that? In my experience, there have been several times when the growth potential just hasn’t come through or there has been some kind of blow-out, or the share price simply moves too erratically for comfort or I have had an ethical change of mind. Have similar things happened to you?

Hi Diogenes. Truth is I hate trading and so I give shares every chance to succeed. I have lost faith sometimes though - even during the relatively short period you have been reading. In the past two years I sold Avon Rubber, Castings, Portmeirion and Alusmasc. Not all of them lost me money but I lost faith all the same. Avon may have been partly an ethical decision, the cows somehow sanitised the investment for me :slight_smile: but I was also uncomfortable with its dependence on the US DoD and sky high share price. The other three, Castings, Portmeirion, and Alumasc I basically lost faith in their strategies and whether they addressed the challenges of the next ten years. I think it is OK to change your mind, but I don’t like endless flip-flopping! Meanwhile the quest for shares I can buy and hold for a decade or more in confidence goes on…

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Thanks for the comments Richard and Diogenes.
Your approach Richard, does have some similarities but the difference is that you are talking about adjusting a stock weight depending on its score, whereas I’m suggesting that an investor should be prepared to dump an existing holding, even if it’s still a good investment, if there is a significantly better one he can replace it with (“competition for capital”). That’s what could happen with the blank sheet of paper exercise if you were constructing a fresh portfolio with the latest available options where these are now superior to some of an investor’s current holdings.