These last years, I've spent a lot of time trying to balance my portfolio the best possible way.
Some aggressive stocks here, some defensive stocks here, many stocks with a low debt level and a few stocks with a higher debt level but with good growth prospects.
Almost all of these stocks were highly predictable.
But then, I realized lately that I could be more aggressive than I was.
Of course, Be Smart Rich is responsible. But there's also Pat Dorsey.
So, I decided to rebalance a bit my portfolio. I trimmed some less performing names and I bought 4 very aggressive stocks. All of them are very very expensive, one of them is barely profitable but growing very quickly. These 4 stocks represent about 8% of my total portfolio.
Here's my rational: if these 4 stocks had a performance over 100% during the last year, at least one of them should continue to do very well during the next year. So, if one of them is doing 100% during the last year and the three others do nothing (negative scenario... because I don't think that 3 of them could suddenly achieve a negative performance and only one positive), the average performance for these 4 stocks would be 25% (100% divided by 4). Of course, things are not that simple. You have to believe in these stocks, not just take a look at a chart and chose randomly the stocks that performed better.
I would never do that with 50% of my portfolio. Very expensive stocks (stocks with a forward PE of 80 or 100... and sometimes even more) are very difficult to value. But I think that I mitigate the risk by chosing 4 of these stocks instead of only one and keeping the total percentage of these stocks lower to 10% of my total portfolio. That's what I'm writing to convince myself that I'm right, at least.
That approach is contrary to everything I've written over the last years. It's a bit like Cat Stevens leaving everything for islam in the late 70's.
Well, not really. Let's say that it's like Cat Stevens chosing to eat halal food for a couple of months just to see if animals that suffered before dying are more delicious.