Portfolio management
Nothing new: a time of great uncertainty

My investment plan for 2021 can best be understood in the context of my overall investment plan.
When I first started saving for retirement I read that stocks outperformed other asset classes over the long haul and that the stock market and economy were subject to substantial volatility.
My investment goal from the get go has been maximum total real return long term. Since retirement this goal has not changed. We live within our means. There should be a decent estate for the kids.
My investment process, which I have followed for decades, is to largely ignore volatility and make purchase and sale decisions based on sound investing principles. I buy only superb companies, what Warren Buffett would call the seven footers, referring to basketball. The only volatility that gets special treatment is true U.S. stock bubbles, of which there have only been perhaps 3 in the last 100 years. I spent from late 1998 to late 2002 in two year bonds. Since the fall of 2002 I have had a 100% asset allocation to stocks. See here for a discussion of bubbles.
One’s investment philosophy must be robust and dependable. It should be simple, complying with the Keep it Simple Stupid (KISS) adage. It should perform well even in face of uncertainty. It must carry the investor through thick and thin. I like to think that mine does that.
I’m an optimist. But, I plan for the worst. Hope for the best. And don’t agonize.
January 2021 context
The last year has been miserable for most everyone. The stock market has been wild. But, it’s all been a natural reaction to a health and economic crisis. It’s impossible to know the route it will take to play out. We will get through it and learn from it. As I tweeted last March in the midst of the market meltdown: “Don’t underestimate human adaptability and resilience.”
At the beginning of January 2021 we have a new year to look forward to. I don’t have any fundamental decisions to make at this point. My game plan was made years ago.
I make no predictions about the coming year. See my post here on predictions.
What I expect looking forward
As I say, plan for the worst. There may be times when my portfolio experiences significant paper losses. It may underperform the S&P 500 index, or other benchmarks, for an extended period of time.
Paper losses on an all equity portfolio might, once or twice or perhaps even more, in an investing lifetime, exceed 50 percent at some point of extreme general financial crisis or deep recession.
If that happens, it would not be the time to abandon my investment approach. I will want to see the bad times through and take advantage of opportunities. The investor seeking a superior return on his investments is happy that the stock market is both unpredictable and volatile. An investment approach based on sound principles of operation uses this to advantage.
I will, however, hope for the best.
What I will be doing over the next 12 months
Essentially I will be closely monitoring our family’s portfolio. This is discussed in the Motherlode Chapter 44. Monitoring your Portfolio
Our portfolio currently consists of 12 stocks. There is no magic in this number. I would be happy with 20 if I could find them. 12 is ok, but the low end of the range. Some may think this pretty concentrated. I explain my thoughts on diversification, balance and risk here and here.
I hold minimal cash reserves as I have perfect liquidity in all my holdings. What I mean by this is that I effectively have ‘dry powder’ to buy any opportunity that comes along. I can sell any existing position in an instant to fund the purchase.
I make no distinction between interest, dividends and capital gains. Some of our discount brokerage accounts accumulate dividends (tax free) and others get cash from my pruning of stock holdings. My thought with any pruning is to view it as cutting out weeds, as opposed to watering flowers. In doing this pruning, I not only think about intrinsic value but also diversification and balance. We live off the cash from pruning.
When any stock reaches a weight of 15% in our portfolio, I sell it down to about 10%. Currently our largest position is in a Canadian mining company, with a weight of 11.8%. I will continue this practice in 2021.
I will continue to look out for new opportunities. A new position will generally start with a portfolio weighting of between 5% and 8%. Occasionally I will buy stock in a company that is in process of becoming a superb company. It may not yet have all the attributes of greatness but will be well on its way. In that case I will limit the portfolio weighting to roughly 3%.
If any company starts to lose its way, I will sell it immediately I come to this conclusion. What I paid for it will be irrelevant. My general rules on selling are set out in a post here.
Conclusion
With any luck it will be a successful year. But, there is no telling.
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To read more deeply on developing a sound investment process check out the Motherlode Chapter 27. Sound Principles of Operation
To dig into the topic of portfolio management you can take a look at the Motherlode Part 7: Building and managing a portfolio
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction.
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