TheMotorcycleBoy's portfolio trilemma

[TheMotorcycleBoy]

I'm now thinking that this is the one for me:

2. Diversify more if something tempts at the right price, and accept that less overall knowledge of each holding is needed since each holding constitutes a smaller percentage.

and slow it down a bit, topping up the World Index Equity tracker if I'm stuck for ideas by the end of any given month.

thanks for all the comments,
Matt

[dealtn]

To be honest, I do have a rationale for holding even the smaller ones. They are small typically because I've not topped them up ever. This is especially the case with NG. since I bought this a couple of years ago in the low 800s and it's currently way too high for me to consider adding to it (in my humble opinion).

If I am being honest I don't understand this (but can rationalise the normal human behaviour around it). At best that's an explanation for not buying any more, but isn't an explanation for still holding it. If the share isn't attractive enough to buy (and presumably there are others that are) then maintaining a holding when you could be turning it into a new, or larger, holding in something else is irrational (absent the marginal frictional costs of doing so).

[TheMotorcycleBoy]

To be honest, I do have a rationale for holding even the smaller ones. They are small typically because I've not topped them up ever. This is especially the case with NG. since I bought this a couple of years ago in the low 800s and it's currently way too high for me to consider adding to it (in my humble opinion).

If I am being honest I don't understand this (but can rationalise the normal human behaviour around it). At best that's an explanation for not buying any more, but isn't an explanation for still holding it. If the share isn't attractive enough to buy (and presumably there are others that are) then maintaining a holding when you could be turning it into a new, or larger, holding in something else is irrational (absent the marginal frictional costs of doing so).

It's because the smaller ones were added more recently, and therefore they have been in my portfolio less time than others and have hence been topped up less.

Furthermore things like ITM and DARK carry much higher risk than things like DGE, and REL etc. So I'd never want them to be as big.

I also reduce a position size to de-risk slightly. I did this to ULVR recently. I didn't feel the need to completely exit it, and it's yield is obviously pleasant.

Having some positions smaller than others makes a lot of sense to me; it 1) informs of my relative confidence in any given share at a given point, 2) and is sometimes indicative of pricing levels favouring topping some shares rather others (hence why am unwilling to top up UKW or NG. at present). It's certainly which I see lot of in some of the popular funds and trusts e.g.

https://www.polarcapitaltechnologytrust ... 1-2022.pdf

I certainly would never consider ditching smaller holding size shares without a good reason (for example I've suddenly lost confidence in the share in question). IMHO there is far too much randomness and uncertainty in the market for me to know whether it would profitable to sell a smaller holding share (which is generally behaving itself), and increase the size of another holding. That would seem too much like trying to guess the future to me. Of course, top slicing is a different matter entirely. I'll periodically do that, but of course it's so hard to time correctly!!

thanks Matt

[dealtn]

To be honest, I do have a rationale for holding even the smaller ones. They are small typically because I've not topped them up ever. This is especially the case with NG. since I bought this a couple of years ago in the low 800s and it's currently way too high for me to consider adding to it (in my humble opinion).

If I am being honest I don't understand this (but can rationalise the normal human behaviour around it). At best that's an explanation for not buying any more, but isn't an explanation for still holding it. If the share isn't attractive enough to buy (and presumably there are others that are) then maintaining a holding when you could be turning it into a new, or larger, holding in something else is irrational (absent the marginal frictional costs of doing so).

It's because ...

I think you misunderstood the point I was making which is true regardless of the size of the position.

I don't understand how you (anyone not specifically referring to you, and certainly not taking a cheap shot) can hold the view something is too expensive (or unattractive) to buy, but simultaneously hold the view it is ok to be in a portfolio. It is a human behavioural instinct to justify that choice, but is a form of bias, such as confirmation bias, or anchoring bias, justifying the "correctness" of a past decision (to buy, and currently hold) but simultaneously excusing the decision not to sell (now and continue to hold).

[Dod101]

To be honest, I do have a rationale for holding even the smaller ones. They are small typically because I've not topped them up ever. This is especially the case with NG. since I bought this a couple of years ago in the low 800s and it's currently way too high for me to consider adding to it (in my humble opinion).

If I am being honest I don't understand this (but can rationalise the normal human behaviour around it). At best that's an explanation for not buying any more, but isn't an explanation for still holding it. If the share isn't attractive enough to buy (and presumably there are others that are) then maintaining a holding when you could be turning it into a new, or larger, holding in something else is irrational (absent the marginal frictional costs of doing so).

It's because ...

I think you misunderstood the point I was making which is true regardless of the size of the position.

I don't understand how you (anyone not specifically referring to you, and certainly not taking a cheap shot) can hold the view something is too expensive (or unattractive) to buy, but simultaneously hold the view it is ok to be in a portfolio. It is a human behavioural instinct to justify that choice, but is a form of bias, such as confirmation bias, or anchoring bias, justifying the "correctness" of a past decision (to buy, and currently hold) but simultaneously excusing the decision not to sell (now and continue to hold).

Well I do not agree with that. Take SMT. During its big rise, I was selling at different levels, from about £6 up to £14.20. I was selling simply because I wanted to bank a profit and anyway it was getting too big a proportion of my portfolio. I would not have bought it obviously at these levels but I was and am still, very happy for it to be in my portfolio.

I also agree with Matt because I too am happy with some shares where the holding is much smaller than others. Mind you, I would not hold his very small holdings for the same reason that IAAG mentioned; it would not matter if these very small holdings double in value, they would still be very small.

Dod

[SalvorHardin]

I don't understand how you (anyone not specifically referring to you, and certainly not taking a cheap shot) can hold the view something is too expensive (or unattractive) to buy, but simultaneously hold the view it is ok to be in a portfolio. It is a human behavioural instinct to justify that choice, but is a form of bias, such as confirmation bias, or anchoring bias, justifying the "correctness" of a past decision (to buy, and currently hold) but simultaneously excusing the decision not to sell (now and continue to hold).

Capital Gains Tax is one reason. I have a shareholding which I consider is a bit overvalued, so I wouldn't buy it at today's price.

But if I sell it I lose almost 18% of the proceeds in CGT. At 82% of market price I think that the shares are cheap. So I continue to hold.

[tjh290633]

It's because the smaller ones were added more recently, and therefore they have been in my portfolio less time than others and have hence been topped up less.

I have a policy of making sure that any new share, such as those arising from demergers or a deliberate swap, are bought at median holding value, or else brought up to that level as soon as practicable.

I also have a policy and a system of topping up holdings, which focusses on those standing below median weight and with above median yields. You will find that system embodied in the HYPTUSS to be found in the Financial Software section of this site.

It might be worth your while looking at it.

TJH

[TheMotorcycleBoy]

To be honest, I do have a rationale for holding even the smaller ones. They are small typically because I've not topped them up ever. This is especially the case with NG. since I bought this a couple of years ago in the low 800s and it's currently way too high for me to consider adding to it (in my humble opinion).

If I am being honest I don't understand this (but can rationalise the normal human behaviour around it). At best that's an explanation for not buying any more, but isn't an explanation for still holding it. If the share isn't attractive enough to buy (and presumably there are others that are) then maintaining a holding when you could be turning it into a new, or larger, holding in something else is irrational (absent the marginal frictional costs of doing so).

It's because ...

I think you misunderstood the point I was making which is true regardless of the size of the position.

I don't understand how you (anyone not specifically referring to you, and certainly not taking a cheap shot) can hold the view something is too expensive (or unattractive) to buy, but simultaneously hold the view it is ok to be in a portfolio. It is a human behavioural instinct to justify that choice, but is a form of bias, such as confirmation bias, or anchoring bias, justifying the "correctness" of a past decision (to buy, and currently hold) but simultaneously excusing the decision not to sell (now and continue to hold).

Apologies, I now understand your point.

I can most certainly justify this point! So I took your earlier statement and add some words which I capitalised.

can hold the view something is too expensive (or unattractive) to buy AT CURRENT PRICING, but simultaneously hold the view it is ok to be in a portfolio WHEN ORIGINALLY PURCHASED for less

Personally that's the nature of the beast (investing wise). I mean all the pricing is arbitrary in the sense, rises in price occurring due to actions of millions of separate actors with both similar and different views of future earning prospects. Holding the winning shares is pure Lynch:

You won't improve results by pulling out the flowers and watering the weeds.

Peter Lynch
http://www.quoteswise.com/peter-lynch-quotes-5.html

[TheMotorcycleBoy]

I also agree with Matt because I too am happy with some shares where the holding is much smaller than others. Mind you, I would not hold his very small holdings for the same reason that IAAG mentioned; it would not matter if these very small holdings double in value, they would still be very small.

I still would. Through my adult life, I've been a very strong adherent to the adage. "Look after the pennies and the pounds will look after themselves".

From my late 20s to my 40s I learnt how to do all our car work, and home maintenance. So, I agree, I'm quite miserly. All the change went into clearing our mortgage early. I remember times when I started pulling myself together (at age 18-19) (I had a weird upbringing), when I did temp and unskilled work, prior to studying for A levels (then degree) about 4 years late. From those days, I vividly recollect planning my food shopping, opening my first building soc. saving account, and depositing spare wages in there. I remember seeing smaller sums accumulate, and opportunities arise as the sums grew.

So of course the smaller value holdings do matter to me. Especially when my Ceres Power holding trebled in value in winter 2020.

Alas the job beckons,
Matt

[Dod101]

I also agree with Matt because I too am happy with some shares where the holding is much smaller than others. Mind you, I would not hold his very small holdings for the same reason that IAAG mentioned; it would not matter if these very small holdings double in value, they would still be very small.

I still would. Through my adult life, I've been a very strong adherent to the adage. "Look after the pennies and the pounds will look after themselves".

From my late 20s to my 40s I learnt how to do all our car work, and home maintenance. So, I agree, I'm quite miserly. All the change went into clearing our mortgage early. I remember times when I started pulling myself together (at age 18-19) (I had a weird upbringing), when I did temp and unskilled work, prior to studying for A levels (then degree) about 4 years late. From those days, I vividly recollect planning my food shopping, opening my first building soc. saving account, and depositing spare wages in there. I remember seeing smaller sums accumulate, and opportunities arise as the sums grew.

So of course the smaller value holdings do matter to me. Especially when my Ceres Power holding trebled in value in winter 2020.

Alas the job beckons,
Matt

Yes but of course that is not the point we are making. however I think IAAG and I have made our point so there is no point in labouring it.

Dod

[dealtn]

I can most certainly justify this point! So I took your earlier statement and add some words which I capitalised.

can hold the view something is too expensive (or unattractive) to buy AT CURRENT PRICING, but simultaneously hold the view it is ok to be in a portfolio WHEN ORIGINALLY PURCHASED for less

Precisely my point. You, and no doubt others, are happy to admit, and carry out in practice, confirmation bias and price anchoring. Normal behavioural traits, so understandable, but you are simultaneously holding the view that certain shares are not worth being in a portfolio (as they are too expensive - or "unattractive") but also worth their place in a portfolio as they have proved to have been good investments (based on the past price). Both statements shouldn't both be true in a rational portfolio.

As humans it is close to impossible to rid ourselves of these kind of biases from our thinking.

On the logic of it being ok you can imagine a share that was bought say 5 years ago that multibagged to 20 times its then purchase price, but in the last 6 months it has fallen by 75% (due to poor outlook, fraud, or whatever). If your view of its future is one that makes it now uninvestable with a new purchase why would you also have the view it is worth keeping based on it being 5 times your purchase price from 5 years ago? Your predicted future returns on that investment, be it a new one, or an existing one, are all that matter. (Again with the exception of any frictional costs - which in case it wasn't already clear include taxes).

[tjh290633]

On the logic of it being ok you can imagine a share that was bought say 5 years ago that multibagged to 20 times its then purchase price, but in the last 6 months it has fallen by 75% (due to poor outlook, fraud, or whatever). If your view of its future is one that makes it now uninvestable with a new purchase why would you also have the view it is worth keeping based on it being 5 times your purchase price from 5 years ago? Your predicted future returns on that investment, be it a new one, or an existing one, are all that matter. (Again with the exception of any frictional costs - which in case it wasn't already clear include taxes).

I can give you an example of that. GEC, first bought in 1989 at 272p and added to at prices down to 197p, bringing it up to avearge weight with an average cost of 202p. Name changed to Marconi and BAE Systems spun off. I trimmed twice at 20% in 1999 and 2000, at 979p and 1183p, then the price started falling as the dot-com bubble burst. I bought back at 353p and 105p, as the dividends kept coming, but that was the last and I escaped at 2.21p in November 2002. How I wish that I had sold the lot at 1183p. My average cost was -11p.

TJH

[TheMotorcycleBoy]

I can most certainly justify this point! So I took your earlier statement and add some words which I capitalised.

can hold the view something is too expensive (or unattractive) to buy AT CURRENT PRICING, but simultaneously hold the view it is ok to be in a portfolio WHEN ORIGINALLY PURCHASED for less

Precisely my point. You, and no doubt others, are happy to admit, and carry out in practice, confirmation bias and price anchoring. Normal behavioural traits, so understandable, but you are simultaneously holding the view that certain shares are not worth being in a portfolio (as they are too expensive - or "unattractive") but also worth their place in a portfolio as they have proved to have been good investments (based on the past price). Both statements shouldn't both be true in a rational portfolio.

I didn't say they were not worth having in the portfolio. I merely stated that I didn't want to top them up at the current market price.

FWIW I've read volumes about confirmation bias, and few of the other "biases".

But what's currently absent is that there are actually two separate, but related concepts here. Price and Value.

Price is the figure which the market will pay for an asset, value is completely subjective. And I guess both of these two concepts are related to an even more vague concept called "risk". Hence I'm happily to hold my NG. shares in my portfolio, because whilst I'm suspicious of market's current price (between about 1160-1230 recently I believe), I have a view (which bears some risk of being incorrect "risk_x") that it will probably remain somewhat higher than my purchase price and pay dividends. Regards topping up now, I believe that the risk of a price drop back to a yield of about 5% is possible due possibly to threats from rising yields, cessation of energy/geopolitical concern (Ukraine), energy price caps etc. This I call "risk_y".

Hence I hold a view of radical uncertainty. I believe risk_y > risk_x and I also accept that I might be wrong in all of this.

TBF I think the psychologists who excessively bang on about price anchoring live in a dream world. Of course we anchor to numbers. How on earth would we make any financial decisions otherwise? As you can see above not only do I anchor to numbers, I believe that the anchor moves around the sea bed with the tides, and furthermore the ocean is so murky that often I can't even see it, I just have a vague notion of where it could be.

Matt

PS. This is all somewhat OT compared to my portfolio trilemma. But it's a very interesting philosophical debate none the less!

[TheMotorcycleBoy]

I also agree with Matt because I too am happy with some shares where the holding is much smaller than others. Mind you, I would not hold his very small holdings for the same reason that IAAG mentioned; it would not matter if these very small holdings double in value, they would still be very small.

I still would. Through my adult life, I've been a very strong adherent to the adage. "Look after the pennies and the pounds will look after themselves".

From my late 20s to my 40s I learnt how to do all our car work, and home maintenance. So, I agree, I'm quite miserly. All the change went into clearing our mortgage early. I remember times when I started pulling myself together (at age 18-19) (I had a weird upbringing), when I did temp and unskilled work, prior to studying for A levels (then degree) about 4 years late. From those days, I vividly recollect planning my food shopping, opening my first building soc. saving account, and depositing spare wages in there. I remember seeing smaller sums accumulate, and opportunities arise as the sums grew.

So of course the smaller value holdings do matter to me. Especially when my Ceres Power holding trebled in value in winter 2020.

Alas the job beckons,
Matt

Yes but of course that is not the point we are making. however I think IAAG and I have made our point so there is no point in labouring it.

Dod

I think it is the point. The small size holdings in my portfolio are equivalent to the pennies to watch. In the hope that some may grow into pounds.

That's how I see it. I'm curious as to how some of the fund managers out there (I mentioned LON:PCT earlier) rationalise having some holdings at 10% of their fund and others at less than 0.1%.

Matt

[Dod101]

You may well be right for all that I know. I agree that some fund managers have very small holdings at times. Call them incubators. I think that is an expression from the now
lamented James Anderson of SMT (which you of course will recognise as Scottish Mortgage)

Dod

[TheMotorcycleBoy]

and price anchoring.

Another point. So with Games Workshop. I've bought them at about £28, £29 and £63. Then I top sliced at £119. I've since added at £102 and also then £82.

For every single transaction I've had the notion of numeric value. I think it's irrelevant whether you say these are "price anchors". If so, then as I said earlier the anchor sure does move about a bit.

I really don't think you can invest, or gamble (speculate) without a notion of numbers. A consideration of previous and current price is required in order that a margin of profit can be calculated. IMHO it seems pointless to worry about whether psychologists say that's naughty "you're anchoring" because you need to have a starting point some notion of numbers prior to making any kind of buying and selling decisions.

Matt

[dealtn]

and price anchoring.

Another point. So with Games Workshop. I've bought them at about £28, £29 and £63. Then I top sliced at £119. I've since added at £102 and also then £82.

For every single transaction I've had the notion of numeric value. I think it's irrelevant whether you say these are "price anchors". If so, then as I said earlier the anchor sure does move about a bit.

I can't see any obvious "price anchoring" behaviour in what you described there. On that basis I also think it irrelevant.

[TahiPanasDua]

"look after the pennies and the pounds will look after themselves" is a highly misleading expression in my opinion.

TP2

[TheMotorcycleBoy]

"look after the pennies and the pounds will look after themselves" is a highly misleading expression in my opinion.

TP2

It helped me clear down my mortgage. Save a few hundred now and again on doing my own car and house maintenance. Save the money and accumulate it. When that is in the thousands make an early repayment. After several years, go in the mortgage with a big smile and present them with a cheque for the final amount.

Works for me!

[TahiPanasDua]

Well done!

You can argue that someone who successfully takes care of the pennies could end up with a big pile of pennies.

TP2.