Thoughts on Rebalancing portfolio

Thoughts on Rebalancing portfolio.

The way I see it, there’s 2 extremes in rebalancing a value investors portfolio.

1)     Long term compounders, the buffett approach, you just want them to growth, so maybe do not rebalance them until there’s obviously a better idea. Like buying the entire company.

2)     Special situation, (maybe net nets) graham approach, where the “goal” is clear.

I wanted to ask you on your thoughts.

Real case story. I own a stock that has grown from 15% position to a little over 50% in a year! But 6 out of 10 positions I have hold, have gone down, like tankers.

I still think this winning stock must go up 5x but is obviously not a 12x anymore. So, the question holds, is it time to rebalance? If not now… when? The answer seems to be obvious “do you have something better than 5x?”, but the level of confidence is different, and subjective.

Why is subjectivity a part of position sizing? Here is a link https://neyinvesting.blogspot.com/2015/04/how-much-of-stock-should-i-buy.html

I really doubt everyone here love all their 10, 20, 30 net nets the same. So, there is an implied bias, that maybe some chose to ignore for simplicity because you are acutely aware of your limitations to predict the future, I am too.

In theory is simple, but here real live. You wake up one morning your alert tells you your net net is way above ncav. Do you just sell right away? I don’t think so, you would try to find what news created the sudden revalorization, and now, with this new information, you will use your subjectivity to decide if you will sell or not, maybe a portion, maybe add up?.

If this last one is the case, then you should constantly be rebalancing your portfolio. Let us face it, the reason you don’t program a bot to do your investing in net nets is because you DO value you criteria as a human at some extend, and that’s why I argue, rebalancing may be a blind spot that we have.

Take on account 2 things, using me as a real world example:

Arguments pro rebalance

1)     This would stop dependance on the ups and downs of only one stock. So, If it shoots up you would have made a mistake, but if it goes down you look like a genius.

2)     As the big position keeps going, make the earnings on others less important, less relevant. Your equity starts to look like that 1 stock, why even bother with smaller positions?

3)     Math said so. But it doesn’t really matter since the input Is subjective too  https://www.netnethunter.com/topic/position-sizing-how-much-of-a-stock-should-i-buy/

Arguments against rebalance

1)     If you do rebalance that 50% position, you may be killing a good investment thesis, something that has been working so far and still has runway. And this money will go to add to losers, positions that you expect to go up, but your investment thesis may be wrong, or has not develop yet.  

 

Even in a diversified group like net nets, you develop more conviction in some positions than others, if you put in the work, inevitable. The argument that having similar positions is the way to, is in may opinion fault, unless you really know nothing about the stocks except the initial 5 minute screening. You have to remember Graham wrote a formula that anyone could follow, he did focus on optimizing. That is the case here.

If your conclusion is an equally weighted portfolio, because you are purely mechanically, I agree that is the best idea, however, how often do you rebalance?

 

 

   .

Popular posts from this blog

VOXTUR – 500% growth in 2022/2023.

Understanding Micron Technology Inc (NAS:MU)

A Different view on Fannie Mae (FNMA) and Freddie Mac (FMCC) "Optionality has value"!