Do you underbuy or overbuy long-term holdings?

[scorpioncapital]

Just wondering for those who don't use Kelly but just your own 'gut' position sizing. After you've researched a position and come to a conclusion you want to own and the price seems OK, do you build in a factor for your uncertainty by:

 

1. Overbuying a bit and then selling down to a what seems the right level for the long haul in case you're more right than you think.

2. Underbuy a bit - or a lot and then increase slowly to the right level just in case you're more wrong than you think.

 

 

[rb]

I'm a bit confused by your post. The title references long term positions, but the body of the post seems (at least to me) to talk about building positions. But I guess the answer in both cases is maybe that I underbuy.

 

In the case of a new position I underbuy because like a lot of value investors I've noticed that I'm in early and my picks seem to have a tendency to drop after I buy them. So now I start small and keep buying as price goes down until I build a position. Of course sometimes it goes straight up, I miss the opportunity and I'm left punching myself in the nuts for not buying more.

 

It the case of long term holds my conviction holds tend to be large positions(7-15%). So when their prices become attractive I tend to underbuy again because if I would be very aggressive those positions would reach truly gigantic proportions.

 

Actually my biggest problem with position sizing comes from client portfolios. At times like these when everything is pretty expensive and a client sends in cash in amounts like 30-50 of the portfolio if really messes up my allocations. I know your AUM going up by 30-50% is a high class problem but it sucks when u have nothing to do with it.

[scorpioncapital]

Yes, you expect to have a longer term core position. But you aren't quite sure where that will be just yet.

 

Actually, this question was inspired by a problem I have because I tend to believe very much as Ken and Phillip Fischer (his dad) did that each sector has different attributes which can dominate the performance in the medium term. Pharma, industrials, technology, financials, basic materials all tend to act differently in different cycles. So I guess the question is more about position sizing when some sectors have pros in one environment and cons in another. Essentially they are more cyclical than average.

 

So far I've decided to underbuy in proportion to my belief in how cyclical/consumer facing I think a business might be in a downturn so that I don't have to bother to sell an overbought position and have to keep monitoring it. (I found this chart useful for this - http://www.sectorspdr.com/sectorspdr/Pdf/All%20Funds%20Documents/Document%20Resources/10%20Year%20Sector%20Returns)

 

 

I like your idea of building upward, then you never have to worry how much to trim down and I also have the experience with the regret of leaving profit on the table. In a downturn though it sure feels good to hold less!

 

PS - Funny I just found this article on position sizing:

https://whatheheckaboom.wordpress.com/2010/10/30/position-sizing-in-value-investing/

 

And these value investing trading rules are just gold:

 

https://whatheheckaboom.wordpress.com/rules/value-investing-rules/

 

 

[Shooter MacGavin]

almost every holding for me in a long term holding.  I never buy unless i think I can hold for 10 years, and I'm pretty conservative in my calculations of returns expectations.  I need to feel that I can relatively safely have a high IRR for a long time before I pull the trigger.

 

Since I won't buy unless I get to a high level of conviction, I just buy a 5%  7% or 10% position on the same day in a few trades.  I just don't see the point of doing anything else.  I don't need to monkey about with trading rules.  I'm looking for 5-6 baggers in 10 years, so I don't care if i catch the bottom tick of the day or the week or the month.  it'll be irrelevant in the long run as long as my thesis is correct.

 

I struggle more with an outsized position - ie my thesis is paying off.  I always have an Ackman/Sequoia style "VRX fear"...a thing that worked so damn well that it grew to an outsized position before it completely tanked.

 

I don't know if this is a good approach or an optimal approach.  but it's easy so it frees up my tiny brain from overheating.

[SharperDingaan]

Most of our holdings are longer term, with the occasional short-term 'trading' overlay if/when conditions warrant.

 

Almost always we will be in a net overbuy. The expectation is that our initial purchases will have to be defended through 2-3 rounds of averaging down, & that the net position may ultimately approach 33-40% of our total portfolio. Of course this isn't the intent, but we prepare for the worst. Key is that 'XYZ Coy' doesn't go bankrupt - hence our cross-over to distressed preferred investment.

 

We mitigate by recovering our initial investment with a partial sale at around 3x average cost. It reduces the distortion the position is causing, & the capital is either recycled into the next position, parked in treasuries, or withdrawn entirely. The remaining position is 'house money' that we simply let ride.

 

The downside is that returns can spike up/down dramatically; hence the conventional measures are pretty useless. ie: A 40% holding that goes from $1 to $2.5 (in one year) produces a 100% portfolio return - meaningless, & ignores the rest of the portfolio. You are also on your own - as there is no way you could do this with OPM.

 

The good news is that over time, the portfolio naturally migrates towards a greater FI weighting - as treasuries/prefs accumulate & wihdrawals pay off debt (mortgages, LOC's, etc.). You also have repeated experience on the equities side - reducing the defence commitment. Greater success on the round trip trades is bonus.

 

It's a long-term game & obviously not for everybody.

But if you can pull it off - it works very well.

 

SD