Continuing with our portfolio adjustments today and some more thoughts on portfolio allocation and risk ratios, which are highly dependent on target prices.
A target price is good for weighing risk/reward, but shouldn’t be used for decision making in terms of when to sell. Investments need to be reassessed before any of those decisions can be made. When we review individual stock investments, we consider a number of different factors.
As trend followers, we begin with reviewing the themes we’re following. If our outlook has changed on a particular trend, we’d look to get out of any positions that play into that trend.
However, we rarely change the trends we follow (we look for long term themes/trends) so that’s not often the case. Assuming the stock fits into our current themes, we look at the individual stock from both a fundamental and technical standpoint. We prefer undervalued businesses, but are more concerned with momentum over the previous 3/6/12 months. It’s tough to go against the crowd for a long period anyway.
Assuming we still like the business, we then assign a new target price and set a new stop loss to get a new risk ratio. These target prices tend to be realistic and optimistic, as we’ve already determined that we believe strongly in the theme and are now looking for the best case scenarios. Regardless of the new risk ratio, no action is taken until reviewing the entire portfolio.
After updating all holdings, we can then review how each stock plays into the portfolio as a whole. At times, we may see the need to add some risk by exchange particularly low reward positions for stocks with greater upside. By assigning both a target and stop loss price, it’s possible to quickly get a best/worst case scenario for the portfolio as a whole, making these decisions much easier than when looking at a stock in isolation.
NOTE: Howard Lindzon’s post about someone asking when to sell $600k worth of Bitcoin inspired my thinking about all the other factors that go into deciding when to sell outside of price. M