October 27, 2013 Comments

On Friday I sold what amounted to 6% of my Toll Brothers shares at $33.56. These particular shares had been purchased two weeks ago at $30.43. This is a strategy I have been using with Toll Brothers, buying on dips and selling on rallies. I do not have any strict rules about this but in this case the swing was about 10%.

Yesterday the latest edition of the free newsletter was sent out. If you did not receive that by email then you could try adding your email to the free list.. The system should let you know if your email is already on the list. There is also a “validation” process for the free list. That is not critical because I send out to both validated and unvalidated emails on the list (always with a link to get removed from the list)

My own portfolio breakdown is updated. I continue to run an extremely concentrated portfolio. More concentrated than I have been historically. I have over 48% of my portfolio in just four stocks and that is 74% of the equity portion of my portfolio. That kind of concentration should generally be considered to be HIGHLY risky. I have never recommended that anyone copy my portfolio and have always indicated that it was based on MY risk tolerance and MY capacity to take risks. I happen to have a lot of faith in each of my four largest positions (Melcor, Wells Fargo, Toll Brothers and Canadian Tire). But I have said that Toll Brothers is speculative due to the high P/E ratio. And banks are highly leveraged by nature and therefore can be risky for that reason alone and property development is a cyclical industry. And I have, over time as it rose, sold about half of the Canadian Tire shares that I held around this time last year when the stock was particularly cheap looking. These four stocks could certainly cause me grief at any time. That is a risk I have been taking. I reveal my own portfolio because some people expressed an interest in it years ago and in the interest of transparency. But such a portfolio may not be suitable for others and it is up to individuals to decide that.

A certain amount of concentration should be expected in the portfolio of a stock picker such as myself. As a fellow stock picker recently said, if you can’t pick stocks you should be highly diversified (invest in index ETFs). But if you are convinced that you have a good ability to pock stocks then it makes sense to concentrate in your best ideas.

Subscribers may want to limit the allocation to an individual stock to some lower limit like 10%. Even that is considered quite high by most experts. The limit is up to you, I don’t offer advise on asset allocation or the limit in any one stock since that is highly specific to each individual.

The reality is that it is impossible for the average investor to beat the index. (Just as the average person can not be taller than average). By following a stock picking strategy subscribers to this site are implicitly or explicitly trying to do better than average. Therefore you have opted for a less diversified strategy. But the extent to which you concentrate your holdings is up to you and I wanted to remind you that my own level of concentration is very high and could be highly risky.

Running a concentrated portfolio is part of the reason I have done so well the past two years. That knife could cut the other way at some point. Hopefully these four stocks are not going to decline a lot more than the market at some point while I still own them. But it could happen. This is part of the reason that I am running with a higher-than-usual cash position. If one or more of these four take a big hit due to a company-specific reason but it is a one-time problem, then I would likely be buying on that dip.

I don’t mean to alarm subscribers. I just mean to let people know that blindly following my own portfolio could be very risky. I prefer that my subscribers take more of an a-la-carte approach and pick and choose from the stocks that are rated after reading the reports. Many and perhaps most subscribers will also hold investments not listed above.

The bottom line is that we all invest at our own risk and we should all understand that stocks do go down at times. And some of them stay down.

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