Micro-Caps, page-8

@Dejavoo,

Given each of our personal situations is certain to be unique (differing risk tolerances, stages of life, personal financial circumstances, investing "DNA" and so forth), I initially thought that there is limited value in comparing portfolio composition.

But, upon some reflection, it occurred to me that it might be a worthwhile exercise, if only to have it confirmed that optimal portfolio construction is a somewhat arcane art.
(And that maintaining portfolios in optimal shape is a virtual impossibility(!) because of friction costs - eg., taxation and transaction costs - when it comes to constant tinkering with portfolios, as well as technical limitations such as lack of liquidity in certain stocks.)

Nonetheless, here's what I believe my portfolio broadly looks like today [*]:




Some clarifying comments:

1. It is a veritable zoo of stocks. Numbering 47, that's about 27 too many, but tax consequences, as well as a current lack of alternative opportunities, makes it difficult for me to perform a cull and to focus just on my highest conviction ideas.

This is nothing new; this "hoarding" of stocks has been the case for several years, but it has gotten quite out of hand over the past 12-18 months as I added a whole raft of new small- and micro-cap stocks, namely FID, SMP, TRS, APD, AVA, BWF, CDP, JAN, LAW, LPE, M7T, PKS, QFE, SKF, SP3, XRF and ZNO. That's a full 17 stocks added, without even a near-commensurate exiting of other positions. But what else is a person to do? It's a dilemma.

2. Despite my pronouncements and good intentions of moving away from large caps to small and micro caps, I have found that to be easier said than done: my portfolio is still dominated by stocks that are anything but small (the green shaded ones represent stocks with market caps less than $500m: collectively, they equate to around only 30% of my portfolio, and that includes my debut investment in a micro-cap manager (falls under "Private")

3. The light blue shaded ones are companies greater than $10bn in size; those 12 stocks (AMC, MQG, WES + COL (I still haven't "separated" them), SHL, APA, ASX, CSL, RHC, TCL, ORG, URW, WBC/CBA) represent around a further 30% of my portfolio. Which is too high, given that I don't see much in the way of undervaluation in eleven of them, the exception being URW (but it has its own challenges, so it can't be owned with any great degree of conviction,I have to say).

I have for the past 12 to 18 months sought to reduce this proportion, but it has been slow going due to the tax implications and also because of the lead time in getting up to speed with parts of the market which have traditionally been outside of my field of interest.

Opportunities arising from the Covid crash in March made it worthwhile, on an after tax basis, to sell down the some of these positions - notably CSL, which I suspect represented well above 10% of my portfolio at the bottom of the Covid collapse - and to redeploy the cash, notably in a few microcap stocks which were hit very hard, as well as a few capital raisings.


4. The un-shaded ones represent stocks between $500m and $10bn in size; around 35%-40% of my portfolio.


Overall, the proportional breakdown is something like this:




5. One final point: Portfolio construction is a function of investment return potential (risk-adjusted, of course). Logically, the more upside a stock is assessed to offer, the more one should own of it.
However, the current weightings of the stocks in my portfolio do not reflect what I assess to be the upside potential of many of those stocks.

For example, my three largest holdings, AMC, BRG and DTL are no longer what I would consider to be cheap (Indeed, BRG's result today is typical of "Buy-the-Rumour; Sell-the-Fact" response from the market to a stock with elevated valuation multiples).

Ditto for the next several large positions, APA, AUB, CAR, MQG, WES (and COL, for that matter) and SHL.
I would happily add more FID and DDR, though.

For what it's worth, the blue ""#" next to certain stocks represents those that I am happy to buy at the moment. As can be seen, the majority of my portfolio looks to be a bit "meh"-ish.


I'm a bit uncomfortable with this sort of self-display and I'm not sure how useful any of it is, other than of passing interest value, possibly.

Because I've long ago concluded that, when it comes to portfolio composition, there is a clear trade-off between optimal portfolio design and portfolio churn (with its attendant friction costs).

Even after some 27 years of this lark, I've always struggled to know where the right balance, between conviction positioning and portfolio turnover, lies.

I expect to go to my grave not knowing.


[*] I say I think that's what it looks like, but its not something I monitor too closely given my family's capital is spread across more than one entity, so I don't know the precise consolidated position, but I think it is something close to that.