Concluding the Current Portfolio Management Series

To start, let me gather together my conclusions from the prior articles, and add one more:

  • Get the right industry.
  • Get a bright management team.
  • Don’t panic over small setbacks. Buy more.
  • Rebalance your portfolio regularly to fixed weights.
  • Dividends matter.
  • Buy cheap.
  • Trade away for better opportunities when you find them.
  • Don’t play with companies that have moderate credit quality during times of economic stress.
  • Measure credit quality not only by the balance sheet, but by the ability to generate free cash.
  • Spend more time trying to see whether management teams are competent or not.
  • Cut losses when your estimate of future profitability drops to levels that no longer justify holding the asset.
  • Diversify, diversify, diversify!

Okay, take another look at the graph above, and see that my gains are bigger and more frequent then my losses. Nonetheless, I took some significant losses. How could I bear those losses? Diversification. No position has ever been more than 7% of my portfolio, and the normal position is 2.9% in my 35 stock portfolio. I can take some whacks on individual positions if my overall investing is working.

My key question in deciding whether to sell a stock is whether I think its future returns are likely to be less than alternative investments. That is the only good reason to sell a stock, but few investors follow that rule. I may get my estimates of future value wrong, but if I do it consistently, my results should be good.

You can review my eight rules here. From my prior articles, you can see how my rebalancing trades have added value overall, even though on my losing trades, they added to the losses. Value works, Momentum works, and industry rotation works if it is done right.

My focus on accounting integrity, similar to to the work done by Piotorski, helps value investing work by avoiding value traps. I don’t miss every trap, but if I miss enough of them, I end up doing well.

Finally, our minds are not geared to make decisions where the dimensions of the decision are large. My methods compress the dimensions of the decision, and turn the decision into a swap transaction, where you trade something worse for something better.

That’s what I do in investing, and perhaps in the near term, I will gain my first sizable external clients. In closing, here is a list of all of my trades over the past 7.7 years:

Full disclosure: long the portfolio listed at