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Portfolio Construction


ericd1
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I'd appreciate some ideas on portfolio construction for an equity portfolio.

 

Let's assume the cash/bonds/stock allocation has been determined. Now, how do you structure your portfolio?

 

How many positions?  How do you weight them? 

 

Do you consider sector, or industry diversification in your process?

 

Other considerations?

 

Thanks in advance / Eric

 

 

 

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We go where the value is, using the Kelly Criterion for capital allocation, bearing in mind that danger lurks where least expected.  We continually recalculate probabilities and odds, always looking for things that might pop up and ruin our day.  That said, we don't like to get in a position where we have to play Whack A Mole, but we may put a few quarters in that game occasionally if the potential reward is great.

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You might want to keep in mind that risk management is very different for a personal personal portfolio. It is not textbook institutional management.

 

1) The cash equivalent component should hold a minimum 6 months of living expenses. If it is in T-Bills assume 95% recovery, 70% if you're holding it in high quality bank paper. 2) The equity component should be in options & stock; the options will be either long puts/short calls on your employers industry, & enough to offset whatever options your employer has given you. For most people that will be most of the equity position. 3) The FI should be almost entirely high quality prefs, & zero coupon sovereigns.

 

Get laid off for insufficent work & it doesn't really matter. You have cash to cover you, & a portfolio hedge that retained the value of your employer granted options. Keep your job & the insurance cost is relatively small while the economy is essentially stagnant. If the economy takes off you have cash to deploy.

 

What should be apparent is that there's a minimum size. If you're below the minimum you should be either repaying your debts (cards, mortgage, etc) or sitting in mutual funds. Of course, none of this is in the textbook  ;)

 

SD

 

   

 

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You might want to keep in mind that risk management is very different for a personal personal portfolio. It is not textbook institutional management.

 

1) The cash equivalent component should hold a minimum 6 months of living expenses. If it is in T-Bills assume 95% recovery, 70% if you're holding it in high quality bank paper. 2) The equity component should be in options & stock; the options will be either long puts/short calls on your employers industry, & enough to offset whatever options your employer has given you. For most people that will be most of the equity position. 3) The FI should be almost entirely high quality prefs, & zero coupon sovereigns.

 

Get laid off for insufficent work & it doesn't really matter. You have cash to cover you, & a portfolio hedge that retained the value of your employer granted options. Keep your job & the insurance cost is relatively small while the economy is essentially stagnant. If the economy takes off you have cash to deploy.

 

What should be apparent is that there's a minimum size. If you're below the minimum you should be either repaying your debts (cards, mortgage, etc) or sitting in mutual funds. Of course, none of this is in the textbook  ;)

 

SD

 

   

 

 

 

VERY Smart Advice!  :)

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Thanks for your comments. I'm semi-retired and have 50% in cash/fixed income, so I sleep well at night.

 

Myth, many thanks for sharing your thoughts and the Centaur Capital presentation. Based on the presentation, I have an ultra-concentrated, super-sized 20 stock portfolio. Fairfax is my only super-sized position at 40% and with the next 9 I have 75% in the top 10. The balance is made up of 20 more positions, where several are in a basket idea, so there are actually about 10 more positions.

 

Thanks again - good information!

 

 

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I am right behind you. I dont want to cut my winners and right now have 1 holding which is about 35% and another which could take up another 25% should things work out.

 

I will have to after the next quarter and will likely switch to options to maintain the same economic exposure without the huge risks. You have a much higher quality name though in FFH. I sold mine due to the Hurricane season and look forward to making it a 10% position very soon. I think a big cat would be main risk and a BP situation with my holding would be mine.

 

My goal is $2 million. $1 million in FI generating 7.5 - 10% to live off and $1 million for equities / junk bonds. No where near there but I would sleep like a baby at that point.

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>>My goal is $2 million. $1 million in FI generating 7.5 - 10% to live off and $1 million for equities / junk bonds. No where near there but I would sleep like a baby at that point.

 

That's interesting... very similar to my thinking.

 

Myth465, what's your target annual rate of return?

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>>My goal is $2 million. $1 million in FI generating 7.5 - 10% to live off and $1 million for equities / junk bonds. No where near there but I would sleep like a baby at that point.

 

That's interesting... very similar to my thinking.

 

Myth465, what's your target annual rate of return?

 

Honestly I dont have a target (I guess 50% annually by swinging at fat pitch small cap ideas with the 40 - 50% of my portfolio not in owner manager well run value companies). I am not sure how I have done thus far, due to leverage, losses, and inflows. I know there is a much bigger pot then 2 years ago though.

 

I had a good 2006 and 2007 (minor successes and honestly had no idea what I was doing).

 

Levered up prior to 2008 (was down quite a bit but learned an enormous amount, just worked, read, worked, read, worked, and read). Paid back all the losses and worked down all the leverage. Not a huge amount of money but a great experience.

 

Had an amazing 2009 like everyone else, fully unlevered. Thus far am having an amazing 2010. I now feel very comfortable and fully understand Buffett when he said he could do 50% with small amounts and small caps. ATSG common, KSP options, FFH Leaps, have all really juiced my returns. ATSG and KSP still have alot of value inmo and I see FBK and hopefully ESV Leaps continuing that trend.

 

My new plan is to go into deep value using options / leaps to limit my losses, while maintaining an economic interest. Once all of the risk are gone (FBK after the equity raise, ATSG after the DHL contract was resigned, KSP after the covenant waiver), I will finally push in heavy using leaps and common. Due to my small capital I should be able to get a good size position without moving the stock. Reading about Micheal Burry got me thinking - They say his stocks go down 50% then move up 300%. If one can limit the down 50% then double / triple down and capture the 300% they can do quite well. Thats what I am hoping to do with deep value, going forward. I now have 3-4 workouts and want my next big idea, thats still moving down.

 

It seems that a few board members have retired off FFH leaps. It shows all you need is a decent cash pile ($100k to $200k), guts, and a fat pitch. If you dont have the guts maybe a diversified basic of 2 - 4 fat pitches. I think I can do well in a Bull or Range bound market, but would be hard pressed to survive a depression. That right now is the biggest risk inmo.

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