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Clear Thoughts
Why Show the Entire Portfolio with Each Trade?
Originally Published Thursday, June 23, 2005
| How do we adjust each portfolio when fundamentals of a stock change? What do we do when rankings of certain stocks drop? |
This is a question posed to us by many new investors and subscribers. To be true to our mission, we need to clearly communicate the exact ranking and weighting for each stock holding as we make changes to our portfolio, meaning how much of each stock do we own upon completion of each trade.
Clarity and transparency are two of the hallmarks of our firm. Outperforming the broad market and our benchmark is our goal. To achieve that we designed our system to invest strategically, which is more complicated than simply buying and selling stocks.
Remember, we are mid- to long-term investors. We have once this year, and in only one portfolio, traded multiple times in the same day. Some portfolios go for more than a week without a single trade.
On most occasions, after we make an initial purchase of a new stock, we will add and subtract shares over time, rather than abruptly exiting a stock, although under the right set of market conditions and mathematical circumstances, anything is possible.
For most stocks, we add and sell shares as their rankings change as directed by our proprietary software. This allows us to favor our more heavily weighted stocks that are rising in our rankings which can happen for a variety of reasons. This rise may be the result of a firm posting stronger fundamentals; or outperforming both their peers within their sector and within our investment style (large, mid or small market capitalization and value or growth); or have no change in fundamentals, but their stock price dropped on a short term basis due to some outside factor. As their ranking rises based on our computer analysis and we buy more shares, we refer to it as an accumulation.
Similarly, we sell shares as stock rankings fall. This can occur based on one or multiple factors. The most basic is that their stock price rises and their fundamentals remain constant. It can also occur if fundamentals deteriorate with no change in stock price. This is commonly referred to as locking in profits, meaning reducing the number of shares owned as the stock price is increasing.
It is also possible for fundamentals to improve and not be immediately reflected in a stock price increase. In such case, we may actually purchase more shares as the stock price increases.
We believe in patience and discipline when investing. We are an asset manager governed by strict guidelines based on our computerized selection process and trading rules. As we buy and sell shares, and simultaneously communicate the trades and their rationale to our investors and subscribers, we continuously balance our overall portfolio gains, losses and the performance potential of each stock ranked by our computers.
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