Building Positions

[cknucks]

Long time reader, first time poster.

 

Wondering if anyone here has given thought to a rules based programatic approach to building positions in companies.  I've tended to take the approach, for instance, that "I'm willing to make company X a 4% position in my equity portfolio" but I tend to buy pretty much all at once.  If I add a position it's typically built in a day or two.  I'm now mulling the concept, for instance, of implementing a rule that I would add to the position slowly over the course of a period of time, i.e. 1% per week or 1% per month.  This would allow more time for rechecking the thesis and curbing my enthusiasm.

 

Is this an approach that others here apply to their own investment program?  I've read quite a bit about what many of the great investors do and have yet to read about them intentionally slowing down their purchases of stocks.

[MG2014]

This has sort of been evolving for me, but once I'm interested in a name, I start by looking at the 52 week high/low range and buy some % of the total amount I want, based on where the stock currently trades within that range.

 

If there's enough remainder and it's not close to an earnings release, I write some puts at lower strikes. If it goes up, I make some income, if it goes down, I get assigned like I wanted. Right before the earnings I'll buy the rest.

 

I'm also considering some technical indicators for entry points. I don't know anything about technical analysis, but I might give it a shot next time I buy something and see how it goes.

 

These are all probably overly complicated ways to ineffectively market time, but eh I guess it makes me feel better.

 

It would be interesting to see what other board members have been doing.

[oddballstocks]

I have a dollar range in my head I always start a position with.  If I can't commit to the minimum range then I need to re-evaluate the idea.  If I really like the idea initially I'll buy at the higher end of the range.

 

A few weeks/months/years down the line if something changes (price/news/sentiment/whatever) I will buy more.  Again I have a range I like to buy in chunks of, same process as above.

 

This isn't a systematized method or anything.  Sometimes I buy more and regret it, other times I miss opportunities.

[rpadebet]

I do a staged approach. Typically I max out a position at 10% of portfolio. So if I like an idea I go in with 2.5% initially. Then I constantly research and do a deep dive (as much as I can). If I still like the idea in about a month or two or after the next quarterly report, I double the position to 5%. I am comfortable with this allocation unless the stock remains undervalued/goes much lower and nothing material has changed in the business to question my thesis and downside estimate. If my thesis holds and stock is still undervalued in about a quarter and I cant find better ideas, I double it to a full 10% position.

 

I only have a couple of 10% positions right now. Quite a few 5% positions and 3-4 2.5% positions. Its a very high hurdle in my mind to get to a 10% position.

[KCLarkin]

It depends on your portfolio size and portfolio concentration. If you have a small, diversified portfolio it probably isn't worth the effort.

 

I like to keep some powder dry so I can take advantage of declines or panics. This has worked well for me in a few of my recent winners. VPRT and AAPL suffered big drops after I took my initial positions and I was able to load up.

 

On the other hand, I missed some opportunities to load up, especially with growth stocks. CSU.TO is up 140% since I bought it last year and I haven't built close to a full position yet.

 

So, I would recommending building positions with negative momentum value stocks. For growth or stocks with positive momentum, I would buy more aggressively when the opportunity strikes.

 

Conviction also plays a role. When I started building my VPRT and AAPL stakes, I wasn't at 100% yet based on price so maybe I should have just waited for a better price. Still, psychologically, I'd always want to have the ability to buy on dips with my high conviction ideas.

 

One strategy I am considering is setting my target position size at 10% but with the flexibility to temporarily go to 15% if something gets really cheap after I have built a full position.

 

[Uccmal]

I dont follow hard rules.  Seaspan - SSW has grown to about 30% over a six year period since I first bought - Dec. 2008.  It happened very slowly buying on dips along the way, and selling at higher points, as well. 

 

BAC, WFC, AIG, have been very slow builds as well. 

 

PWT has been relatively quick to 10%.  I wont go any higher though. 

 

There are many others since I initiated SSW that I bailed due to better deals elsewhere or out and out disasters. 

[AtlCDore]

I dont follow hard rules.  Seaspan - SSW has grown to about 30% over a six year period since I first bought - Dec. 2008.  It happened very slowly buying on dips along the way, and selling at higher points, as well. 

 

BAC, WFC, AIG, have been very slow builds as well. 

 

PWT has been relatively quick to 10%.  I wont go any higher though. 

 

There are many others since I initiated SSW that I bailed due to better deals elsewhere or out and out disasters. 

 

Uccmal,

 

Did you find that buying and selling SSW offset any tax implications?  Would you have been better off holding to date?  My problem has been I have sold something with the idea that I could buy it back lower but then at times have missed buying it back either because it didn't go lower or I thought I could buy it back even lower and screwed up.

 

Why won't go any higher on PWT?  Just curious.

 

Thanks,

 

AtlCDore

 

 

[tlee19802]

If I am buying a company with a large market cap, I buy to my heart's content in 1 day. For small caps, I might have to spread my buying over a few days due to volume issues. The only time I revisit an idea is when earnings come out or some major news/event comes up on my screens. I also revisit a stock when the price moved 15% from my purchase price. I like to keep it simple.

[tlee19802]

Oh and in terms of sizing, I have done trades that are 30% of my portfolio size (I have a small portfolio). I don't believe in diversification because good ideas are hard to come by.

[TwoCitiesCapital]

I generally buy over time - generally months if it's a large, long term position for me. I used to buy all at once, but I've found that Im generally early and regretted not being able to average down after a 15-20% decline.

 

A "full" position would be around 10-15% for me and I generally start off by buying around a 2-3% position. As I do more research, see some results, and especially if the price drops I begin loading up buying more in 2-3% increments.

 

It's rare for me to have a portfolio of 10 10% positions. In reality, I generally only have 3 or so full positions at any given time and as many as 10-15 other positions that are in various stages of building OR are short term trades that seem likely to pay off.

[Uccmal]

I dont follow hard rules.  Seaspan - SSW has grown to about 30% over a six year period since I first bought - Dec. 2008.  It happened very slowly buying on dips along the way, and selling at higher points, as well. 

 

BAC, WFC, AIG, have been very slow builds as well. 

 

PWT has been relatively quick to 10%.  I wont go any higher though. 

 

There are many others since I initiated SSW that I bailed due to better deals elsewhere or out and out disasters. 

 

Uccmal,

 

Did you find that buying and selling SSW offset any tax implications?  Would you have been better off holding to date?  My problem has been I have sold something with the idea that I could buy it back lower but then at times have missed buying it back either because it didn't go lower or I thought I could buy it back even lower and screwed up.

 

Why won't go any higher on PWT?  Just curious.

 

Thanks,

 

AtlCDore

 

SSW:'I have never sold it out.  I have traded portions of the holding.  It would be better to buy and hold for sure from a tax perspective I suppose, but I have accepted that I dont do that real well.

 

I am doing much less trading these days of my common stocks to minimize the tax implications.  Partly, its building trust in an operation - takes years.  I am not sure it really matters in the greater scheme of things - My ten year CAGR is in excess of 20% - after tax. 

 

PWT: Two reasons: a) risk management: what if it drops much more - Its unlikely to reach zero but 1.50 is not impossible.  I can reassess on the way down.

b) If it triples/quadruples it will make up far too much of my holdings for a commodity play. 

 

 

[tede02]

My personal experience is like many others here.  It seems inevitable that when you make a big purchase, the price declines there-after.  I've found building positions gradually to be the best bet.  I don't have a rigid system for doing this.  I basically just consider what is the maximum amount I'd be comfortable holding.  I'll start with perhaps 25% of whatever that figure is and work my way up. 

[BG2008]

Before I initiate a position, I always mentally play out how I would add/trim if the price increases.  For me personally, I have max position size for

 

1) Punchcard quality investments, size at over 10%

2) Asymmetrical that have chance of going to zero, bps to 2-3% max

3) Basket approaches - numerous net nets

4) Farm team names - names that you're okay starting out at 1-2% and follow the company for a while and either increase or trim your positions over time

 

1) For a 25% max punchcard name, I would buy 15% and leave 10% dry powder in case price decreases.  I tend to know my punch card names really well.  There aren't too many variables and the probability of downside is very remote. etc. 

2) Asymmetrical - starter position and just monitor any binary outcomes.  Sometimes asymmetrical can become deep value, i.e. debt refi, govt regulations going your way etc.  I tend to scale up or trim down depending on the events unfolding 

3) Basket approaches - tend to buy 1-3% right off the bat

4) Farm team names - These have potential to become a 5-10%, perhaps I need to track the names  a little longer, listen to a few quarters of conference call etc.  It's good to have them on your farm team so you can follow the prospect for some time. 

 

 

Overall, I tend to hold a large amount of cash in the portfolio.  It's good to mentally imagine what I would do if the price moves against me.  It forces you to think about the next 2-5 different permutations of outcomes and what they would entail.  Sometimes I add when the price goes up because the price movements lags the additional value implied by the events/news.  Others don't need to follow my "buckets", but it is helpful to have your own buckets as I am sure not every investment is a "punch card" in your portfolio.  Hope this is helpful. 

 

[SharperDingaan]

Usually 5-10% initial, be prepared to double it, then hedge. If you have to double, you're going to be married to it for quite some time; so you need a big position to comp you for the time & effort that its going to take.

 

SD

[LC]

SD, how do you think about hedging? Do you hedge 100% exposure?

[SharperDingaan]

When we decide to hedge we hedge 100% exposure. No hedging unless we have already doubled down; very aggressive if we're at 20% of total portfolio & its lower quality, less aggressive the lower the weighting and the higher the quality.

 

Very much a business view. We're in the business of taking risk & raising volume to lower unit cost (cost base in investor terms) is a standard business practice. Thereafter we hold a bar-bell; liquidate 50% of the position to prevent further losses, & hold the proceeds in T-Bills. Essentially, a condom.

 

The nice thing is that the combination acts an infinite life long straddle, & in most cases the bulk of the investment will be house funds. If you are holding a dog, the wise man will have ensured that the hedge proceeds were about equal to his initial investment; so if it BKs tomorrow its just opportunity cost - not cash.

 

SD

 

 

 

[AzCactus]

I think it really depends the entire structure of how you view things.

Let's say that you bought a 5% stake in  ABC company at $10 thinking that its worth $20 within 3 years.  And subsequently the price drops to $7.50 (25%)--if you still think that the company is worth $20 then both your margin of safety and return would be increased.  The potential return would go from being a 2X ($20/10) to about 2.66X ($20/$7.50).  In terms of position weighting relative that depends on how much volatility you are really comfortable with.  There are some investors who are super concentrated and successful (Brave Warrior, Pabrai, and Arlington) while others are more diversified and successful (Klarman, Akre).

[SharperDingaan]

We prefer concentration over diversification, but with concentration comes the requirement not to rely on the portfolio for risk diversification. You have to deal with the cause, & accept it will take some time to cure; spreading the pain over the entire portfolio just makes it bearable.

 

Most folks are not going to any accept significant additional volatility from a double down, hence the hedge if there is a marginal additional drop. If it drops significantly the cure is more shares for the same dollar investment, and a tax refund to reinvest; benefiting the position AND the overall portfolio.

 

SD