One question I get a lot is, why do you have so many positions in your portfolio during times when the market is trending well, wouldn’t it be better to hold fewer positions with bigger allocations?
This is a great question and one aspect of my strategy that I haven’t spoken about at length here.
In good markets, like the one we have currently, I like to hold anywhere between 10-20 positions on the long side. That may seem a lot for a swing/position trader, it’s hard to herd that many positions, stocks are often like cats, they may follow you down the street, but they aren’t going to walk right next to you the whole time. But that number of positions is a bit misleading. Why? Because I think in themes when it comes to trend and momentum trading.
At any one time I believe it’s important to have in the back of your mind some major market themes, what’s working and what’s not in terms of sectors, industries, beta, mean reversion or momentum, quality companies or crap companies, international or domestic, technology trends, demographic trends…
I can keep going. The point here is that you want to key in on a few of them. Right now we are seeing a few very important themes emerge. Agriculture is on fire as food inflation is real and the underlying commodities are running. The cloud is big and that trend is just beginning. Gold is at all time highs and the miners are not ignoring it. Emerging market financials are on fire because of growth overseas.
These are the trends that I have picked to key in on. Once I’ve done that, I look for stocks that pass my screens and have been placed on my watchlist to set up technically. And now we get to the point of this post.
Instead of buying one stock within each of these themes, I like to buy a mini basket. Two or three stocks usually does the trick. Why? Because I don’t want to get the theme and the trend right, and the individual stock wrong. Buying two or three names covers me there, I can get stopped out of one because of some unforeseen corporate action, and still have the other two go my way. It’s about spreading the risk of the individual stock.
And it’s not that difficult to herd two or three stocks within a theme, even four or five. Right now I have three emerging market bank positions in IBIBI (IBN), Grupo Financiero Galicia (GGAL), and Bancolombia (CIB), and they generally move together although they are in different countries. I own four materials positions in [[SLV]], Silver Wheaton (SLW), Buenaventura (BVN), and Chemical & Mining of Chile (SQM), they move together as well.
This isn’t the only way to operate, but I feel for my personality, I want to get the trend and the theme right, and I’m willing to give up some beta to make sure that I don’t pick the one wrong name out of the group.