This will be a short piece, because what I have to say is simple. My portfolio rule eight requires me to make changes to the portfolio 3-4 times a year. Here’s the rule:
Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.
It’s a useful rule, but what if the search that I do doesn’t come up with any suitable candidates for purchase better than what I currently own?
That is what has happened in the second quarter of 2015.
This hasn’t happened before.
I did my main search, and came up empty-handed. I then did about five additional searches that I never ordinarily do, but are other ways of sourcing portfolio buy ideas. Three also came up empty. One gave me an idea off of a spinoff happening later this month, and another idea that was kind of interesting, but made me edgy regarding margin of safety. The last search gave me four ideas that I am still working through, but none of them thrill me, for various reasons.
I know what my most marginal ideas are in my current portfolio, and I can honestly say at present I like all of them more than all of the remaining ideas I am still kicking around, minus the spinoff. (The key question on the spinoff is how cheaply it trades post-spin.)
After all of my searching, it makes me wonder from a bottom-up point of view whether the market isn’t overvalued. Top down, the market should return about 4.5%/yr over the next ten years, which is about the 87th percentile in terms of expensiveness.
A lot of money can be lost speculating on that idea, and I am not a market timer, so I will let others fight about that. This is just a straw blowing in the wind. Practically, it means this period I do nothing with the portfolio, most likely. It gets tougher if this repeats next quarter.
Your opinions are welcome in the comments.