portfolio management

Portfolio Themes: Spring 2022 Updates

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In our portfolio management, we try to pick and choose our spots. We’re investing for the long term, after all. We are not indexers; we invest in individual companies for their unique characteristics and the potential behind their story. We avoid knee-jerk reactions to any day-to-day news.  

Sometimes, though, the daily news covers an issue that’s big enough to linger. Much of the news cycle lately has been dedicated to the war in Ukraine. The implications for the global economy are profound and have a direct impact on our work. 

The war may be accelerating trends that were already there, but now they are more pressing. 

OIL, ENERGY, FOOD, & BEYOND 

Maybe you’ve noticed at the gas station, but one of the big impacts is the price of oil. In the short term, we foresee great profits for oil companies, but skyrocketing oil prices and energy uncertainty have also renewed interest in the next energy revolution. Solar power and electric vehicles have been on their way for a long time, but the world needs them more urgently than ever before. 

These issues are interconnected with trends in agriculture. Ukraine and Russia are not only both food producers: they’re even bigger producers of fertilizers, supplies, and equipment. Agricultural commodities were already on the rise before war broke out, so food producers around the world were already investing heavily in new planting. The journey ahead will be interesting for even “boring” food production and distribution companies, but greater profits may be rapidly approaching. 

THE IMPACT OF INTEREST RATES 

Those rising prices have energized more interest in durable commodities such as copper and gold, which we’ve been following in our shop for a long time

But the double whammy of rising interest rates and rising materials costs has a cooling effect on the housing industry, which we have been easing out of by steps. The shortage in the nation’s housing supply persists—and probably will for a spell. For now, homebuilders are a longer-term, lower-priority investment for us. 

WHAT THE PANDEMIC MEANS FOR TECH 

In times of strife, investors tend to seek comfort and safety, so more volatile sectors such as technology are starting to come back down to earth. We believe this may create buying opportunities in software and internet companies, which are less vulnerable to high interest rates and commodity prices. (They are often light on debt and low on material costs.) 

Even as COVID-19 continues across the globe, some areas of life have become more manageable. The air is clearing a little for airlines and travel stocks, although we are more interested in another area of potential: biotech and pharmaceutical companies. While pharmacy stocks may be easing as the pandemic rally subsides, we are looking forward to new breakthroughs in the years ahead. The advances made in the pandemic, we believe, will prove to offer even more applications elsewhere in the future. 

TAKING STOCK 

The world is a complex place. As always, our thinking evolves on a weekly basis through our research process. Our vision, however, stays trained on these longer-term trends—and what they mean for our longer-term plans and planning. 

Clients, want to know what this means for your portfolio? Please email us or call. 


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.  

Stock investing includes risks, including fluctuating prices and loss of principal. 

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. 


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Probabilities Versus Possibilities

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Our energy is a finite resource. Sure, we consume food and we sleep to replenish our bodies, but they too don’t last forever. The basic formula for kinetic energy requires velocity—movement. But we don’t always direct our movement in the most skillful ways.

For instance, we humans are great at focusing on low-probability events. After all, these are the events that catch headlines: “if it bleeds, it leads” the saying goes. (I mean, how do you think the world ended up with Shark Week?)

We wrote recently about bear attacks, among all things, and now we’re thinking more deeply about these ideas. What if instead of placing so much energy into unlikely (albeit scary) events, we limit our focus a little: what if we focused more instead on what’s probable?

In the markets, we hope to see at least the typical patterns of probability. Some ups and downs every year, a general trajectory of more up than down across almost any stretch of five or more years. No guarantees. But these are the general probabilities of the long-term proposition.

We don’t lock into losses by treating drops like the end of the world. Of course fatal shark attacks do happen, they are real, but we don’t stay out of the pool because one time somebody got eaten out in the open sea. That just wouldn’t make a ton of sense, huh?

The possibilities are endless, and they could consume us until our last breath. Let’s direct more energy toward what’s probable.

Clients, want to discuss what’s probable and suitable for your situation? Reach out anytime.


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The Twenty Stock Concept: A Deep Dive

Clients, you know that our communications are you-centric: we prefer to focus on the situations, challenges, and concerns facing you. But from time to time it makes sense to talk about the tools and techniques we use to meet those issues. Let us give you some background and then introduce a strategy that’s become an important tool in portfolio reviews: the Twenty Stock Concept.

There are many ways to invest for the long haul, and we strive to participate in the growth of the economy over time. Many people’s financial objectives require the growth of capital, whether to improve their financial position, build toward retirement, or preserve purchasing power.

We manage individual stocks for people (which, by the way, is one of the services that sets our shop apart). Because we prefer to invest in the ownership of carefully chosen companies rather than buy investment products made of hundreds of holdings, it’s become more and more important for us to develop a systematic and efficient way to monitor and adjust portfolios over time.

At any given time, our Buy List includes 30 to 35 equity opportunities, which we supplement with more diversified ballast holdings. Client accounts may then wind up with even more names in them, as sometimes positions are held even after they’ve rotated off the Buy List. Doing it this way creates a lot of moving parts…

… which is where the Twenty Stock Concept comes in! This strategy helps us pare things back to only those parts of our investment philosophy that we feel are most fundamental. This list of holdings becomes the template from which we work for new portfolios and for reviews of existing portfolios.

The foundation of the Twenty Stock Concept is great companies trading at fair prices. These are usually blue-chip companies that dominate their sectors. They are our first picks, and we expect to hold them for a long time. We usually have 10 to 12 of these blue chips on our list.

To round out the list, we select what we perceive to be the best opportunities from the rest of the Buy List. These will include cyclical companies that we hope and believe we are purchasing at favorable points in the cycle. The rest of the opportunities may include other bargains from anywhere else in the investment universe.

Because the Twenty Stock Concept is a starting place, a template, not all of our holdings are fundamental enough to make the cut.

What gets left out? Our main investment approach also includes a handful of speculative growth-seeking holdings. Some of these may be smaller, unproven companies that we see explosive potential in. Others are regional or sector plays in areas that may or may not pan out. We think there is a place for these holdings—otherwise we would not have them to begin with. But some clients may not need or want the turnover and volatility they bring.

As an in-house system, the Twenty Stock Concept serves two functions for us: it allows us to provide a focused offering for those who prefer to own a smaller number of names, and it gives us a consistent approach that we makes our services available to smaller accounts than we would otherwise have the capacity to manage.

No guarantees, of course. We base our work on our opinions; no matter how carefully we do our research, sometimes the future confounds us.

But it is intensely interesting, and often rewarding. Clients, if you would like to talk about this or anything else, please email or call.


Investing involves risk including loss of principal.

No strategy assures success or protects against loss.


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Re(balancing) Act

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We’ve got something that may sound like a riddle at first, but this situation captures an idea that we apply here in the shop. 

Suppose you took some of your money and split it equally between two stocks, both trading at $20 per share.  

Let’s say that after a year or two, one of the stocks rose to $30 while the other fell to $10. 

Another year or two later, they leveled out again, and both stocks were back at $20. But your investment has not been a wash. How? 

It might appear that your holdings are right back where you started. There is, however, a simple portfolio management strategy that can help us take advantage of back-and-forth movements.  

Imagine if you had rebalanced your holdings in the two stocks when one went to $30 and the other went to $10. If you had sold off a third of your $30 stock and put the cash toward the $10 stock, you would wind up having twice as much of the cheap stock as you did of the expensive stock—and bringing both positions back to the dollar amount they were when you originally bought in. 

But now when the high-flying stock gives up its gains, you already took some out, so now the price decrease affects a smaller portion of your portfolio than if you’d held onto all the shares. Similarly, when the depressed stock recovers, you get to enjoy the ride up with more shares than you took on the ride down. 

Using rebalancing, this situation would leave you sitting on a net profit of one-third of your original investment—even though both stocks are back at the same price they were when you first bought them! 

Rebalancing works because it applies the simplest investing axiom: “buy low, sell high.” When you rebalance your portfolio, you are selling a little bit of the higher-priced stuff in order to buy a bit more of the lower-priced stuff.  

Trying to “time the market” is a fool’s errand; rebalancing takes the guesswork out and turns it into a matter of arithmetic. 

As always, there are no guarantees: in the above scenario, if the cheap stock kept going down from $10 to $5 and the expensive stock went from $30 to $60, you would look awfully silly (… although not as silly if you had sold out of the one entirely!). 

Stocks do not go up forever or down forever: We generally expect a lot of back and forth. By taking on the risk of missing out if there ever is an extended period without back and forth, we have a chance to use the back and forth to our advantage. 

Clients, when you have any questions about what this means for you, please call or write. 


Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. 

Investing includes risks, including fluctuating prices and loss of principal. 


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Time to Get Off the Ride

We’ve all heard the basic maxim of investing: “Buy low, sell high.” And at 228Main.com, we have talked repeatedly about the perils of buying high or selling low. Just last week we asked, “Where are you on the ride?”

It is true that buying high or selling low can easily hurt you, and to avoid acting rashly, you do need to be able to recognize where you might be in a cycle.

The flip side may be true, too: you also need to be able to make timely moves when the time is ripe. Our philosophy focuses on value investing, and we are fortunate enough that you, our clients and readers, have internalized many of these notions. (So you know that we are not talking about “timing the market.”)

So the “buy low” part is relatively easy: hunting for bargains is fun and exciting! It is easy to look at a company trading at depressed prices and imagine the possibilities, even as you know that they may not necessarily come to pass.

The other part—”sell high”—is more difficult. A holding that has treated you well can be hard to get rid of. It is easy to get greedy and let it keep riding in the hopes of further returns.

But what goes up must come down. The more inflated prices get, the less sustainable they are. When prices enter an unsustainable bubble it is wise to protect your gains by selling while the selling is good.

This does not have to be an all-or-nothing process, though. You might still believe in a company’s long-term story even if prices look unrealistically high right now, in the short term. In this case it might make sense to hedge your bets by only selling part of your holdings. This lets you pocket some gains while keeping some exposure in case of future growth.

This becomes especially important when you have a high-flying investment. If certain holdings are outperforming the rest of your portfolio, they may swell up to become oversized relative to the rest of your holdings. Over time you may find yourself with too many of your eggs in one basket; periodically rebalancing away from a hot streak can help spread your risk around.

Of course, there are no guarantees. None of these strategies are magic. But letting your investments ride with a few big winners can leave them vulnerable to a big tanking at even a hint of bad news. Heck even totally decent news can spell a crash for a hot stock that’s being held up by unrealistic growth expectations.

How do we know when it’s time to get off the ride? Clients, when you have questions or concerns about your holdings, please call or email as always.


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.