mardi 23 décembre 2014

How to balance your portfolio

I haven't read a lot of analysts about how to balance a portfolio. I think it's an important subject because we're never sure about anything with the stockmarket. Also, I think that a lot of investors are buying when prices are low but don't think too much about proportions (this investment VS all the others in the portfolio).

Bernard Mooney, the guy that wears brown suits and wrotes articles in has written a couple of books about investing. The last one suggests that you shouldn't invest more than 10% of your portfolio on a single stock.

At first, you may say: "Why 10%? Why this guy uses such a nice number as 10% and not 8% or 12,5%? How should I trust a guy with such a funny name?"

Keep calm my friend. Breathe a little ventolin. I know that some guys like Warren Buffet, Bruce Berkowitz, Bill Ackman, Carl Icahn and a lot of other superinvestors who manage more than one billion dollars have more than 15, 20 and even 30% of their portfolio on a single stock. If those fuckers don't mind betting a couple of billions on a single stock, why should you retain yourself about betting 50 000$ on Blackberry? Nothing retains you my friend. Nothing except intelligence. Because don't forget, if you don't shit in the streets and don't fuck all the beautiful girls you cross, it's because you have some intelligence.

I don't know about Jason Donville's portfolio concentration these days, but I know that at the beginning of the year, a little more than 10% of his portfolio was concentrated in Concordia Healthcare and maybe another 10% in Constellation Software. The concentration wasn't abusive. Just at the limit of what I would be comfortable with.

First lesson. Here's my suggestion of a number of positions to hold in a portfolio, depending on the money you've got:

Between 0 and 3000$: One company
Between 3000 and 10 000$: Three companies
Between 10 000 and 20 000$: Five companies
Between 20 000 and 100 000$: Ten companies
More than 100 000$: Fifteen companies

I don't think anybody should hold more than 20 companies at the time in a single portfolio. I think that the best number of stocks is about 15.

I don't think it's useful to hold less than 2% of your portfolio on a single stock.
I think it's dangerous to hold more than 10% of your portfolio on a single stock.

Sure thing, if you hold one or a couple of positions for more than 10% of your portfolio, this position should have a low beta, previsible revenues (growth quarter after quarter for a couple of years) and should be active in a conservative sector. The management must be A1 too (a lot of insider ownership, no dilution of shares or a dilution that goes with high growth, managers with a good reputation and blah blah blah).

When your biggest position is 10% of your portfolio, a drop of 10% in the value of this position affects your portfolio for only 1%. You can see that such a repartition could minimize bad periods or even bad choices of investment.

Be humble. If you think that you could do well with only 4 positions, it's up to you, but I think you could dilute risk a little more by adding 6-7 other positions. It's impossible that only 4 stocks in the stockmarket offer good appreciation potential.

That was the lesson of the day. 

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