On 18/04/2011 21:56:00,
Colin Farrier
wrote:
Portfolio Concentration
Diversification: I do believe in a modest amount of diversification or else would I put all my money into the stock of the company at the top of my shortlist? However I have been up to 25% in that top stock.
Selection process: I have a selection process that uses data from REFS going back 10 years for each company. Assuming that the data is consistent within and between companies then I have built a model of what has happened over the immediate past and I make a small assumption that this will roll forward for the next year. If in practice it does not then my model for this company is broken and I want to sell. Since the model has much higher performance than the average company then a small degradation can be still too small to notice for the analysts who affect the market price and I may sell at the ‘current price’. This sell early can also be considered some safety margin.
Short List: If my shortlist only has, say, two or three companies, how should I allocate capital at the next economic downturn? I still believe that a large proportion of investment ready capital (after allocating sufficient cash to a reserve) should be allocated to the number 1 company followed by a smaller amount to number 2.
