With 70+ holdings, I thought I would whittle this down by 10 or so, just to improve the overall portfolio quality.
But how could I do this objectively, ignoring any bias for story stocks, or anchoring based on price paid or time held?
On my company post for HLMA, I referenced an ex-CEO’s speech. He mentions he would not purchase companies with a roce less than their target roce (which in turn, over time, obviously helped them achieve their targeted returns).
Also, I remember when a relative required hospital treatment, the hospital said they would not undertake an operation unless they thought the chance of success was greater than their current average success rate, thereby increasing their ‘stats’ over time (sad but true!).
So, combining the above with:
Greenblatt’s methodology (allocating a rank for each metric, for each individual portfolio company, and summing the rank for each company by metric), the metrics being:
Fundsmith’s preferred metrics - roce, gross margin, operating margin and cash conversion (I ignored debt because non of my holdings have significant debt) ,
I got to an ‘objective’ system by creating my own ‘Frankenstein’s monster’ ranking system. I eliminated/sold my least favoured 10 holdings from the ‘below average’ section (bottom half) of the ranking system, and re-invested the proceeds within the ‘above average’ section of the ranking system, in my most favoured companies (which were already held).
This in turn increased the average ‘look-through’ metrics of my portfolio overall.
(It depends what sort of an investor you are, whether the above is useful to you. I tend to ignore forecasts, stories and turnarounds, instead looking for a trend of increasing chosen metrics).
In the future I intend to use the above to look for:
drops in ‘rankings’ for each individual , when compared to the previous quarter, as an initial source of investigation, as well as
screening for ‘swaps’ - i.e. looking for listed companies with metrics far above current average portfolio metrics, and ‘swapping’ them with below average portfolio companies. This should increase my portfolio average metrics further upwards over time.
Further, I think I am just going try to trade quarterly, to ignore market ‘noise’.