The Portfolio MYTH-----Do you need to change your thinking?

[craft]

Craft when you pick individual stocks as we all know you do you are implicitly predicting that over the long run the sum total of your picks will outperform the market

When I pick individual stocks I'm trying to beat the market and I monitor and manage how I'm going. But I'm not predicting I will beat it, just giving myself a chance and because I want to do it over the long term I'm not willing to take chances that could kill me financially.

There's no getting around the fact that I need a story about the future to compare reality against as it unfolds - you can't manage if you don't know what your expectations are. But my story's about the future are just bullsh!t fiction based on my judgements from past and present observations- not predictions.

To confuse bullsh!t fiction with predictive ability could lead to excessive risk taking.

 

[Value Hunter]

Deepstate your last post completely went over my head too much jargon and maths for a simpleton like me. Craft you are just trying to rationalize your predictions.

 

[craft]

Craft you are just trying to rationalize your predictions.

Perhaps, or maybe it's a subtlety that makes all the difference. You may never know.

 

[Ves]

There's no getting around the fact that I need a story about the future to compare reality against as it unfolds - you can't manage if you don't know what your expectations are. But my story's about the future are just bullsh!t fiction based on my judgements from past and present observations- not predictions.

To confuse bullsh!t fiction with predictive ability could lead to excessive risk taking.

It's a hard realisation to make.

But I think once you've made it, it's even harder to continue doing what you've been doing. I know in my case it made me step back from stock-picking a lot.

 

[craft]

It's a hard realisation to make.

But I think once you've made it, it's even harder to continue doing what you've been doing. I know in my case it made me step back from stock-picking a lot.

Worked the opposite for me. More inclined to go with my best judgement and manage my mis-judged stories out then baulk because I don't feel I have perfect foresight. Sift the gravel out and you get left with the gems.

 

[Value Hunter]

I would like to hear from those who switched strategies from having a diversified portfolio to being concentrated or vice versa. I used to be more diversified when I first started but became more concentrated over time. My returns improved after I became more concentrated.

 

[Value Hunter]

By the way I would be interested to hear from people like Craft and Deepstate, and other respected investors on the forum, hypothetically speaking over the past 5 years would your performance have been substantially better if you had evenly split your capital into your top 3 investments/ideas (top 3 by position size) and eliminated all other positions?

 

[Klogg]

By the way I would be interested to hear from people like Craft and Deepstate, and other respected investors on the forum, hypothetically speaking over the past 5 years would your performance have been substantially better if you had evenly split your capital into your top 3 investments/ideas (top 3 by position size) and eliminated all other positions?

I wouldn't consider myself a respected investor, as I don't have the years of experience required to show a long-term annualised result. Nevertheless, I'll throw my 2cents in to add to the conversation.


One of my biggest mistakes happened to be one of my largest positions as well. So if split my capital evenly between the three, my record would be horrible.
The more I look at it, the more I find I can't deal (emotionally) with the volatility of a very concentrated portfolio. I have typically held about 8 companies, with position sizes varying from 5% to 18%, and some cash holding.

As an example of the emotional hit, my largest holding basically halved in price (it wasn't my largest holding when purchased. But it did increase by 100% in a year, then subsequently moved back to the purchase price).

All of this of course, relates to returns and volatility. To put it into perspective, my dollar weighted average return has dropped into the high teens, from what was roughly 30%. The problem with my metric of course, is that the first two years of running my portfolio had a capital amount of ~5-10% of current size... So recent gains/losses are overstated, and it should be framed using a time-weighted calculation. Using this, I get about 17% p.a. (as of last night)

Since looking at it in this light, I have decided to increase the number of companies, with an end goal of 12-15, although that may prove to be a little too rigid. I'd also like to be close to fully invested, provided I can find companies that meet the hurdle rate I set.
There would also be some availability bias in this, as I've underperformed a few indexes over the last 6 months. I'm sure if you asked me this question a year ago, my answer would have been slightly different. Not a good thing, and I need to ensure I enforce these rules, whatever the decision.

 

[Value Hunter]

Klogg I dare say your portfolio has not been running for long enough to form a conclusion (on how concentrated you should be) either way.

 

[craft]

By the way I would be interested to hear from people like Craft and Deepstate, and other respected investors on the forum, hypothetically speaking over the past 5 years would your performance have been substantially better if you had evenly split your capital into your top 3 investments/ideas (top 3 by position size) and eliminated all other positions?

No.

Using hindsight to identify the actual three top performers and then saying what if I had only invested in those three - well then mathematically of course the answer has to be yes - but I can't pick stocks in hindsight. Prospectively I would have probably picked the wrong three - I can't know for sure which ones I would have picked because I am now biased by knowing what has actually unfolded - But if picking only three I seriously doubt I would have picked my best three.

My game is not picking the few best - I don't have those prescient abilities. My game is risk management through position sizing and managing my mistakes out - the best take care of themselves and eventually overwhelm my incompetence.

My best three over 5 years taken as a snapshot last year is different to the best three for the last 5 years and I'm sure the best three over 5 years when viewed from next year's perspective will be different again - so really, what's the use of your question?

 

[Value Hunter]

Craft. The use of my question is for investors to contemplate by reviewing their portfolios if they had a more concentrated portfolio would they have achieved higher returns? In your case your answer appears to be that you are not sure.

 

[craft]

Craft. The use of my question is for investors to contemplate by reviewing their portfolios if they had a more concentrated portfolio would they have achieved higher returns? In your case your answer appears to be that you are not sure.

No.

I'm sure!!!!!

 

[minwa]

Craft. The use of my question is for investors to contemplate by reviewing their portfolios if they had a more concentrated portfolio would they have achieved higher returns? In your case your answer appears to be that you are not sure.

Reviewing as in hindsight picking the better performers ? Then of course higher absolute return will be achieved by concentration. It's hard to go back now after seeing the performance to say which you would've picked as the best performer without bias.

Return on volatility/risk which is more important for most managers will be a different story.

 

[skc]

hypothetically speaking over the past 5 years would your performance have been substantially better if you had evenly split your capital into your top 3 investments/ideas (top 3 by position size) and eliminated all other positions?

Using hindsight to identify the actual three top performers and then saying what if I had only invested in those three - well then mathematically of course the answer has to be yes - but I can't pick stocks in hindsight.

Craft I think you mis-read Value Hunter's question.

He is talking about top 3 investment ideas, as measured by position size at the time of buying, for those investors who have different position sizes for different stocks (depending on risks, level of conviction etc).

Not the top 3 performers some time in the future.

 

[Klogg]

Klogg I dare say your portfolio has not been running for long enough to form a conclusion (on how concentrated you should be) either way.

FWIW it has been running for 5.5years. To determine my emotional response to volatility, I don't necessarily need 10 years. Even three months of volatility is sufficient for that.

As for long term track records, anything under 10 is insufficient, but each to their own

 

[craft]

Craft I think you mis-read Value Hunter's question.

He is talking about top 3 investment ideas, as measured by position size at the time of buying, for those investors who have different position sizes for different stocks (depending on risks, level of conviction etc).

Not the top 3 performers some time in the future.

I can't answer it then because I don't position size on strength of idea. I have upper and lower limits for exposure at cost, where things finish up sitting between those two number is driven more by ongoing portfolio management, personal liquidity and stock availablity at desired price etc.

 

[craft]

Craft I think you mis-read Value Hunter's question.

He is talking about top 3 investment ideas, as measured by position size at the time of buying, for those investors who have different position sizes for different stocks (depending on risks, level of conviction etc).

Not the top 3 performers some time in the future.

Had a look at what my actual three highest positions at cost was 5 years ago. Answer still is a big No.

 

[Value Hunter]

Yes, skc that is exactly what I meant, thank you for clarifying that.

On that basis where do you stand skc? Would you have done better?

 

[skc]

Yes, skc that is exactly what I meant, thank you for clarifying that.

On that basis where do you stand skc? Would you have done better?

No. I don't really adopt vastly different position sizes based on level of conviction. I have 2 broad groups of positions... core and speculative. The speculative ones are like boom or bust type plays... e.g. a PDN which is probably technically insolvent but may have some strategic value. The core ones are the companies that I intend to hold across longer timeframes. If one core position is bigger than another that is purely due to issues like liquidity / order entry etc.

 

[peter2]

My portfolios are built by accumulating trades that all start with the same amount of risk (eg 1% of available capital). This creates portfolios with approx 12 stocks when fully invested. Starting with a lower amount of risk (eg 0.7%) creates portfolios with more stocks (upto 16).

To create a portfolio with less stocks in it would mean increasing the initial risk (eg 1.5% or 2%). This would create a portfolio with only 6 - 8 stocks. Reducing the number of stocks further would mean increasing the initial trade risk even more (eg 3% - 4%). I wouldn't be comfortable with this amount of risk (downside exposure) in any one stock (in case of disappointing news). However I could do this using one or more market ETF's.

The question I'm pondering is, would a portfolio with a core ETF position (30-40%) and a lower number of trades (6-8 risking 1%ea) produce the benchmark out performance (higher returns/lower DDs) that I now enjoy.

A strategy that collects winning trades while culling the losers may end up with many stocks but as they're mostly winners does it matter how many there are? It's also more likely to get into a good trade that increases much faster than the index when we start trades in many stocks rather than a few.