Another great letter from a reader:
Hi David,
I enjoy your writing. I find myself of a similar mindset. I am an investment advisor running my clients individual accounts in a value fashion. I am currently have my clients invested in about 20 positions. My question is in regards to a new account….I have held off on buying the same positions in that new account unless any of the 20 positions still fall within my estimated “buy” range. Therefore, a new account opened today may sit in cash for some time until new ideas are found, or the 20 positions from the other accounts fall back to a buy range. How do you handle this? Do you use a model portfolio and all accounts consistently look alike?
Thank you and keep up the good work,
Dear Friend,
My value proposition is that clients get a clone of my accounts. ?I am my own biggest client; what I get, they get, less fees. ?I set them up to mirror my account within a week of receiving the assets.
The main reason I do it this way is that there is little rhyme and reason to target prices. ?I don’t have any target prices. ?Rather, I compare stocks against each other using a scoring system quarterly, and I sell companies that are relatively ?expensive and buy companies that are relatively cheap. ?Read my article Portfolio Rule Eight to understand this better. ?I realize few managers manage money this way, but I think it is a way that reflects how the markets really work. ?We should not compare individual stocks against cash, but compare stocks against each other. ?We should compare the stock market as a whole against cash, to analyze whether it is absolutely rich or cheap.
Sincerely,
David
I see reasons for both processes described.
Mostly I think it related to taxes.
When buying you want to own what is cheapest. But selling is more difficult. You can’t just sell what you find as expensive than other stocks you own. I own stocks that are fairly priced but I won’t sell for tax reasons.
Corning is an example of this is my portfolio. Took a punt on it because it was cheap right before they launched some financial engineering that unlocked that value. Its up 50%, but still in short-term gains. When it turns into long-term gains I will have to reason whether I can find things I’d rather own after paying taxes.
I think taxes are a good reason why I wouldn’t replicate my portfolio with new money.