Finally, no longer expensive, page-20

"May I ask the following - I know you dislike selling companies of good quality, not in the least because of the CGT implications, but do you manage your portfolio weights i.e. do you (perhaps largely mechanically) trim your allocations of companies so they do not become glaringly overweight in your portfolio? Or do you continue to keep most of your investments (and indeed add to them) as long as you think these companies will materially increase their intrinsic worth in the future, and let the weights fall where they might through the natural forces of the market."


The latter, mostly, but it depends on the nature of the investment (i.e., whether it is of a GROWTH or a CYCLICAL nature).

I long ago learnt the painful lessons of selling shares in high-quality businesses that have long duration growth trajectories, and in the process crystalise a tax liability, only to suffer further indignation by watching the share price continue marching inexorably upwards in the subsequent years.

So, for "GROWTH" businesses like, say AMC, ASX, ARB, AUB, BRG, CGF, CSL, DLX, EMB, IRI, GUD, IFL, NHF, REH, RHC, RWC, SDF, SCG, SNL, TCL, TME, and WES (which I assess as having the ability to grow earnings for a long time), I will generally not sell these - even though I believe them to be fully- or even over-valued [*].

Because I know that at some stage in the future, the earnings grow with chew into the valuation multiples to the point where the stocks are no longer expensive and their prices can resume rising in line with the increase in earnings.

In my experience, around 65% or 70% of my portfolio comprises these sorts of "sticky" situations.


On the other hand, I find that about 30% or 35% of my capital at any given time is represented by stocks I own because they are purely "deep value" or "cyclical" type of investments; in other words, businesses that do not display long-term organic growth attributes, but whose financial fortunes are subject to cyclical forces and which I like to think I can buy at the bottom of the cycle.

This category of stock I will happily sell when I think the valuation gap has closed (either that, or if I find that I have made a mistake in either my "timing or my calculation of fundamental value). For example, some time back I acquired - and then subsequently sold - RIO and WOR. In both cases I think I did very well, but I sold too early (I suspect I always will do)

Currently, stocks I own that I consider to fall into this "CYCLICAL" category are: BOL, CBA, CTX, CYB, DTL, IAG, KME, KOV, LGD, LYL, MQG, MND, NCK, OMN, ORG, SDI, VRT, ZNT.

Of these, I am close to selling CTX, CYB, IAG, KME, MQG, NCK, and ORG, because I think they are now fully valued.


"I, as a relative novice, would love some colour on that aspect of portfolio management. I err on the side of inactivity i.e. the oft-used phrase "letting your winners run"."

Novice or old geezer; I am convinced that one ever stops learning in this game.

Yes, I think that letting the right kind of "winners" run makes sense, but winners whose share prices don't really go anywhere over time, but instead rise and fall in cycles... those sorts of winners should be sold when they are fully valued, and the capital gains tax hit copped on the chin.


But as I said before, there is really no right or wrong answer for this kind of stuff; just like we each have individual personalities and circumstances, so too will what works for each of us be different in some way.


[*] Of course, where it is tax-effective to do so I will; for example if I have incurred capital losses against which I am able to offset capital gains, or once each financial year in small amounts. But the extent of this is never material in the scheme of things.