Continuing…
A portfolio should be treated like a sports team. Only the best get to play. I found this concept drilled into my head while reading Netflix’ Reed Hastings’ “No Rules, Rules” on how they fire people because they want only the best. They mean no ill will and these employees who get fired are still the crème de la crème of talent and they wish them well with a great severance package and industry loves these ex-Netflix employees as well (As an aside, I would have killed to hire a few last year but all I got were ex-gaana and ex-viacom – good guys but not the 10x guys I sought)
I felt that’s how the portfolio pipeline (or dugout) should be. The only businesses that get entry should be ones you will be willing to hold for much longer (If its broke, you get to keep both the pieces). The ones sold are also perpetually on the cards for a comeback if something will take time to play out or if valuation is back in favor. Only the best get to play on any given day and today’s best may not be the best few months down the line.
We tend to naturally glorify and sing paens of winners and resort to idolatory and hero worship. This leads to our heroes overstaying their use-by date. Also what helps teams win is not heroes but good players – I always liked Ponting’s team and how they took the ’03 and ’07 WC though on paper we had our heroes. I also liked the timing of Gilchrist’s retirement to Sachin’s. On the topic of timing, we must strive to time entries and exits like VVS, requiring least effort, almost zen-like. Only by trying we can at least get lucky
Any good thing when stretched to its extreme becomes an anti-pattern (tech guys will know). Buy-and-hold and Buy-at-any-price used to be good advice but have become anti-patterns. This approach of churning is what evolved naturally for me from poker and sports and quantitative momentum strategies. However, I noticed a bit of discretion and avoiding mindless timed rebalancing could do so much better, if ego is checked out
So managing a portfolio is like managing a team and who gets to be part of the team and playing 11 should depend not on how good the business is but on how good a return the stock can make for you and how certain you are about the return. You should have a sorted-list, like a leaderboard in your head on what those are, for any given month/quarter/year. Like playing the players best suited for the pitch and conditions, you must have the best present in the portfolio. There is a cost for switching stocks just like there is for switching players or for firing an employee – the switch should justify the price
It is also good not having any “notional” cagr or index-to-beat returns in mind as it limits how you approach the game. It is what Jayasuriya and Kaluwitharana did in the 90s for ODIs, and Bazball in tests of-late. When you don’t limit yourself to a “good score’ and do the best possible you can do, the results will take care of themselves. The only risk there is, is the risk of ruin – i.e going bust (strong selection process, adequate diversification and zero leverage helps)
Some of these are applicable even for long-term portfolio construction, its just the timeframes or the sport, is different. Apologies for the long-winded response as my thought-process in this is not linear and draws from several ideas and is still constantly evolving. In short, we should avoid the dogma that comes from different schools of investing and find what works for us and that requires constantly thinking and tinkering.
I am just a novice sharing what I do without filters. I do not advocate this approach and even I am not sure how long I might stick to it in its present form
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