My This Year's Winners And Losers

We are almost at the end of the year, and I'm pretty much done buying stocks for the year. It is also a good time to look back and see how my this year's stock purchases have done so far.

Stock Purchase Returns for each position I bought this year

When adding new money to existing stock positions, I like to follow a strategy called:
Throw good money after the winners and not the losers
The whole point of this strategy is to add most of the new capital into existing positions that are showing the strongest momentum in terms of price growth, while limiting investments in positions that are in red.

The strategy gives my portfolio a very strong upward momentum (as shown in the chart above), which not only helps generate very strong overall returns, both in percent and absolute terms, but it also helps psychologically to see more black than red in the portfolio at any given time.

Even if the market were to go down by 20% tomorrow or the next day or the week, my total portfolio value would still be in the black. This is because the strongest of the stocks that drive the most return in my portfolio, are also some of the largest positions that I own and are likely to weather a market downturn much better than the weaker stocks or positions.

An investor tends to make better investment decisions, when they see themselves winning. It's the psychology of a winner at play.

I want to feel like a winner, even when the market is down big time, because that's when I'm going to need that winner's mindset the most to make the best decisions and not feel scared of market negativity.

To manage individual position risks and utilize strengths in my portfolio, I like to use a position size management style for each of my stock holdings. A position is simply a size of any given stock in its current market value in relation to the total portfolio market value.

I further reduce risk by categorizing all of my stocks as either Core or Non-Core.

The Core Stocks

These are the stocks which I consider the least risky, the most mature, and the most stable in terms of dividend payout and growth. Examples of such stocks include JNJ, BA, LMT, INTC, CMI, and so on.

I like to give these positions a priority when investing new money. I want the heavyweights and the winners to keep driving the value of my portfolio and the dividend income.

My Top 10 Positions By MV

The Non-Core Stocks

For non-core positions, which are mainly made of relatively newer stocks that have not proven themselves yet to be worthy of core position designation. These are normally smaller positions that I've added within the past year or so and have not yet decided to build up.

A vast majority of non-core stocks fall under the turnaround or value stock category, such as TGT, KSS, IBM, etc. Also, some of my most riskier stocks fall under this category.

The non-core may also include stocks that are considered blue chips (e.g. MSFT), mainly because of their small (< 2% of MV) position size. If and when such stocks become value stocks, I would add more to them to try to build them up to a core position; otherwise I may get rid of them in favor of an existing bigger core position.

When I need to raise cash or if there is a danger to a dividend, I can trim or eliminate a non-core position quite easily and without thinking twice.

My Bottom 10 Positions By MV

Out of all my non-core positions, IBM, ETN, ADM, and ENB are worthy of adding more. DLR used to be a much bigger position, but I cashed half of it out when it got too overly priced. In hindsight, I should have let DLR run. I don't know if I will ever get a chance to add more to it, especially at a good yield.

I would like to add more to my MSFT position too, but I feel I missed the opportunity to add, and the stock has risen too far and too fast. I might just cash out MSFT position with a nice profit next year, and deploy the cash to build up the top non-core positions with higher starting dividend yields.

I like my portfolio to be made up of a majority of the core stocks, both from Market Value and income standpoint.

Current Portfolio Composition By Core vs. Non-Core Stocks

When limiting downside risk to capital loss in a non-core position, I like to use Cost Basis (CB) as a percent of Portfolio Value (PV), to set a position size limit. For example, for a non-core position such as in a turnaround story stock, I like to limit position sizes to less than 2% CB of PV.

In other words, an invested capital of 2% of PV is all I'm willing to lose if the non-core stock were to go to zero.

Summary

I just showed you how I manage my stock positions by dividing them into core and non-core positions and then staying disciplined about how I add new capital into these existing positions, and by prioritizing core positions over riskier or newer non-core positions.

This strategy seems to be working well for me as most of my winner positions are of much bigger size than the loser positions, which only means one thing: Higher total returns from stronger and more stable stocks.
You want winners to be the largest, and the losers to be the smallest allocation in your portfolio
Thanks for reading and I look forward to hearing about how you manage your portfolio.

Disclaimer: Author of this article is not a licensed/registered financial or investment adviser and does not provide investment advice. Any mention of stock names/tickers in this article or website is not a recommendation to buy or sell. Please do your own due diligence before buying any stocks. This article is for informational and entertainment purposes only. Full disclaimer can be read here: Full Disclaimer

Comments

  1. I really like your thinking on the winners mindset, something for me to think about more moving forward.

    Great post, keep it up!

    ReplyDelete
    Replies
    1. Thank you very much, and I'm glad you stopped by.

      Delete
  2. I think this type of strategy is great during a bull market. How did it fare during the financial crisis? Good to review the performance through an entire bear market and bull market cycle...

    ReplyDelete
    Replies
    1. There was only one stock I was holding and even buying during the dot-com and financial crisis and it was INTC. I was buying the stock using my employee purchase plan. I had no investment experience or strategy at the time.

      I just kept holding and buying the stock with my hard earned money regardless of what the market was doing. I had no concept of core stocks, but I knew the company was very strong and would weather any storm.

      Now, I've some of the biggest gains in that position.

      Point I'm trying to make is that it doesn't matter whether market is a bull or bear, if you stick with the real winners, which are some of the strongest and well run companies and you are meeting your primary objective (for me it is income generation), then all is good regardless of what market does.

      The stock pays me the same income whether it is at the bottom or top of its price range. Valuation only matters when buying or selling a stock.

      Thanks for stopping by and your comment.

      Delete
  3. Hello Mr. ATM, You have a very well thought out process. I think it's great to have a portfolio management process in place and stick to it through good and bad times. Discipline like this is very important to keep emotions in check when either fear or greed are running high.

    You touch on a question I have in the paragraph about managing individual position risks. If you let your winners run and make them a priority for adding new money, how do you keep your winners from becoming to large a % of PV? I can tell you are doing something from the manageable size of the %'s in the core chart, but I am not sure what it is.
    In other words, if one or more core positions grows very large, do you have a sell criteria based on valuation and individual position size to re-balance the portfolio?

    Nice post, Tom

    ReplyDelete
    Replies
    1. Great question.

      I used to trim my winner positions indiscriminately when they reach a certain overvaluation level, this would normally happen when the current yield dips below a 2% mark and/or MV exceeds 10% of PV.

      In the recent years, I've modified the above rule to be optional for core stocks, but still mandatory for non-core stocks. I did this mainly to ensure that I can keep my strongest core winners, even if they are overly valued. This ensures the bulk of income continues to come from the strongest core stocks, no matter how overvalued they may be.

      High quality income generation is the primary goal of my portfolio, with total return a secondary goal. Therefore, even if we enter a bear market and my overvalued core stocks take a nose dive, the income I get from them will stay unchanged and hence, meets my primary goal of high quality income generation, regardless of stock valuation or market swings.

      The optional clause still allows me to trim an overly valued core position under certain situations where I could put the extra cash to a better use. For example, I could trim half of my 2% yielding core position that has doubled in MV (e.g. BA) and reinvest the proceeds in a 4% yielding utility, this would instantly double my income from that transaction. Since I don’t have a paycheck coming anymore, I often utilize this method with non-core holdings (seldom with core) to increase my net dividend income.

      Over the years, I’ve learned that letting your core positions run the longest, generates the largest overall returns with least amount of risk. My oldest INTC position is 17 years old with a YOC of 7.5% and a 206% gain at today’s price. Unfortunately, it is not the biggest of my positions as I’ve foolishly trimmed it over the years. Though, it is still big enough that I can sell it today and cover my two years of living expenses. That is something!

      Had I kept all of my INTC shares through the years, I could have been able to buy a small condo or two with the proceeds : )

      Hope I answered your question and as always, I appreciate your insight and feedback.

      Delete
    2. Your reply struck a chord with me. I foolishly sold off my company stock over the years to diversify. Over the past 18 years, it has gone up 16125%. If I kept every share, I would be able to buy a mansion in every country in the world and still have enough left over to maintain them all. Ouch!

      The 1% I still hold of my original shares is worth more than all my other assets combined. Lol...

      I'm the best example of why to let winners run. The less tinkering the better.

      Delete
    3. 16125% that's a big Ouch! You must be working for Apple or the like. Well you still own 1%, so that's something. Wish Intel stock had appreciated that much, though there is still potential.

      Take care.

      Delete
    4. I was an early engineer at a company hotter than Apple... ;-)

      Yes, I've been buying up Intel. I think there's a chance for a turnaround. Good luck!

      Delete
  4. That is a good way to divide up your portfolio. Makes sense that the core positions all have big gains or are at least positive. They should be over time as long as their great histories continue moving forward. Helps to make the portfolio safer overall too.

    ReplyDelete
    Replies
    1. Thanks for your comment and stopping by Daze.

      Delete
  5. Good stuff, Mr ATM as usual. I also tend to invest in stocks that have momentum. I have a good friend that strictly looks at value plays, which is fine, but sometimes those will stay dormant for a long long time.

    I'm a sucker for progress I guess, I like to keep things moving.

    Thanks for letting us into your brain :)

    ReplyDelete
    Replies
    1. Hi DS,

      Yes, value plays can easily become value traps, so it's always prudent to limit exposure to such value stocks till they can show growth.

      IBM is one such stock I own in a small non-core position and won't add to it, no matter how cheap it gets, till the company/stock starts to show growth.

      Thanks for sharing your thoughts.

      Delete
  6. Hello Mr. ATM, Just checking in with your site and it looks like you are doing some site redesign work. Do you have some new goals with your blog or just feeling creative? Tom

    ReplyDelete
    Replies
    1. Hi Tom,

      Oh l was just getting tired of the old look, so thought l should do some redesign.

      What do you think of the new look?

      My only goal for the blog is to keep it interesting and somewhat useful.

      Delete
    2. I thing it looks great and I think you are achieving your other 2 goals (interesting and useful) as well! Tom

      Delete
    3. Thanks Tom for the kind words. My wife thinks the new layout is a bit too dark and gloomy. Maybe I need to add some color to it.

      Delete

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