I did a major rebalancing of my growth strategy last week, and thought I'd give you a real-time look into the thought process behind managing an institutional portfolio -- which includes a glimpse at my holdings and what I like and do not like. If you run institutional money, many of the ideas will resonate and some may be new or, perhaps, even abhorrent. If you run just your own personal account, some of my actions could give you ideas on how to exploit the things that institutions must do.
The portfolio you are looking at is my earnings momentum strategy/valuation sensitive "growth at a reasonable price" (GARP) strategy. It's risen at an average 6% annually over the past 14 years, outperforming its benchmark, the S&P 500, by more than 300 basis points per year.
I have some key disciplines that work for me, but other portfolio managers might find unattractive. Ultimately you need to use disciplines that mesh with your personality. There are many great money managers on this site, some doing the complete opposite of me, yet they also make money. Rule No. 1 for any trader is to know your personality and adopt a style that fits it. My key disciplines are as follows.
1. I do all trades "at the market" -- I have no price sensitivity. If I no longer like a stock, it is time to sell, not try selling at 5% higher. If I like a new idea, I buy it at this price. The current price factors into "liking" it. If I like a name, but the valuation or price is wrong, I ignore it and move on to other ideas that are right.
2. I trade in whole positions, for the most part -- especially for sales. If I don't like a name I own, the complete position is sold immediately. If I don't like it anymore, there is no reason to continue holding any of it. Similarly, if I am buying a new name, I buy a complete position. I don't scale in, nor do I put in limit orders below the market. You either like it here or you don't. If you do, take your position; don't dawdle.
3. I run my strategy sector- neutral, meaning my sector weights match the benchmark. I focus on stock selection as my alpha source. Again, this fits my personality. I have never felt like I could make a great sector call, and don't want to add value as a sector rotator. So I eliminate the need to compare the financial sector to consumer cyclicals, for example. Instead, I just focus on the best stocks within each sector.
The starting portfolio is shown here.
I haven't traded since mid-December -- and, as I look over the portfolio, I see a number of issues I need to correct here. First, there are several names whose earnings momentum has declined to just "average" or worse. This does not necessarily mean estimates are being cut, just that they are no longer "top of the list." I only own those kinds of names -- stocks I would buy if I were starting with a fresh piece of paper and 100% cash.
Speaking of cash, I have too much. I was carrying a fair amount this fall, but in this rally it is a real drag, so I need to get more fully invested.
In keeping with my sector neutrality, I have a few here that are out of balance when compared with the benchmark, and need to be brought in line. For instance, my energy-minerals exposure is too high thanks to big wins in Marathon (MPC) and HollyFrontier (HFC). Some sectors are underweight, such as non-energy minerals (mining stocks), but there are no names with any earnings momentum, so I will leave them zeroed out.
In part two of this piece, I'll go over the trades I've put in, and the rationale behind them -- as well as how the post-trade portfolio appears.