The most common new year resolution seems to be to “Exercise More, Eat Balanced, Lose weight,”. In our personal lives we are all very keen to lose the flab by exercising more, eating a well-balanced diet and end up losing weight to reach our optimal weight. However, for some reason we neglect to that with our portfolios.
This new year resolve to have more muscles in your portfolio, i.e. companies which are more active in their business growing it well and are more profitable.
Add companies which eat a balanced diet which is calorie optimized, i.e. companies which consume reasonable amount of capital to grow and don’t consume too much capital. These are companies which have high capital efficiency.
Further, lose the flab, i.e. companies which have too much debt, non-operating assets or sub-optimal assets and companies which are overweight, i.e. overvalued.
So, we need to take this mantra and review our portfolios. Start with a review of how many companies are there in the portfolio? Do you have less than 10 companies in your portfolio? It is probably very unbalanced. It is as if you have focused on building only some muscles, say biceps. Rest of the muscles have been neglected.
If you have more than 40 companies then the question arises as to are you clear about what you hold? Do you remember why you bought these companies and why you continue holding them?
Most important, is the portfolio skewed? Maybe you have around 20-25 stocks, but only top 2-5 stocks make up more than 50% of your portfolio. In this case your portfolio is hyper-concentrated.
Resolve to have around 25 stocks with a maximum allocation of not more than 4-5% per stock. Also resolve to have at least 4-5 different sectors and industries represented in the portfolio.
Further, resolve to cut out companies from the portfolio which are consistently making losses or have volatile revenues and earnings. There is too much business risk in such companies. There is no reason for you to support such companies. You are investing to make profits for yourself and not to provide charity to unstable businesses.
Next, resolve to remove companies from the portfolio which have high leverage. High leverage makes these companies risky for the shareholders. Also, it indicates fiscal imprudence in many cases.
Next resolve to remove the companies which have low profitability and low capital efficiency. These are companies with no competitive advantages and destroyers of shareholder capital. They probably invest in flabby projects which make the companies fat.
Finally, resolve to clean-up the portfolio of overvalued companies. Companies which might have survived all the above flab-cutting might still be creating flabbiness in your portfolio because they are overvalued. Overvalued companies are pulling your potential returns down since what you got for your money is probably less than what you could have gotten if it was fairly valued or undervalued.
All in all, the above exercise is a full-fledged portfolio de-flabbing plan which is likely to make your portfolio a lean, mean, compounding machine, i.e. a SuperNormal Portfolio!
However, if the above is giving you a headache, a much easier process is available. You can avail of our free Portfolio X-ray Analysis and then avail of our SuperNormal Portfolio @ SuperNormal Prices based on our Scientific Alpha Investment Engine!
Happy Investing! Happy New Year 2019!
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