PORTFOLIO UPDATE: DIVERSIFY THIS
During the trading day Friday, I tweeted the following:
To take profits on SPNS was a difficult decision for me since I believe the company is in an early growth stage here, with upside possibility far in excess of where it is currently trading. I did want to free up capital, however, to take advantage of newer opportunities that present a more balance risk/reward trade off going forward. I am looking forward to buying it back at more advantageous prices in the months ahead.
I have been adding to a couple of existing positions over the past couple of weeks, with an eye on those positions within the portfolio that offer a substantial cushion against risk in the event of a market pullback. Those additions will be detailed in the May monthly summary.
What can easily be gleaned by the performance of the portfolios YTD is that they function completely independent of the market averages. There is little correlation to any specific benchmark, which has its advantages and its drawbacks. The drawbacks come when you have a runaway train for a bull market that is focused on mid to large cap names that have some measure of name investment recognition involved. The small-cap names that I follow have been reluctant to move unless fundamental developments that warrants an adjustment in valuation take place. This again firms my view that we are in an institutionally driven market advance that hasn't even come close to reaching the speculative proportions that signal a market top of any significance.
With that said, I expect there to be a substantial "catch up" in the portfolio names as the second half of the year brings about positive fundamental developments as well as a more speculatively inclined investor.
There continues to be an excess of cash in the portfolios relative to the 100% allocation towards equities my model says I should have here. Again, this excess of cash is a risk management decision as opposed to any bearish short, intermediate or long-term bearish opinion on the markets.
As of the close today, the portfolios are 60% invested in WMIH, CIDM, JMBA, IWSY and MITL. The remaining 40% sits in cash for the time being. This 60/40 allocation has been in place for over a month now with some slight tweaking taking place to add or subtract exposure along the way.
On another note, I am going to further tighten the parameters I use to determine whether a name should be included in the portfolios. In looking over my results over the past 18 months, I have noticed that my focus has been spread thin among 12-14 names per year instead of the target of 6-8 ideas per year. Ideally, I would like to thoroughly understand each company I am invested as much as possible. When I am looking over 12-14 names per year, this becomes an increasingly difficult task.
In the financial markets, there seems to be only two types of institutional investors nowadays: Indexers and closet indexers. There is an enormous discount being placed on the ability of managers to understand the companies they are invested in, with an emphasis placed on understanding the risk involved with each investment with great detail. Instead, an attempt is made to vaguely understand each situation, with risk management instead being placed in the incapable hands of diversification.
My approach to the markets is completely opposite, in that I take concentrated positions with a very detailed understanding of the risks involved in each position. I believe in my best ideas and my ability to research these ideas thoroughly enough to take positions that can make a difference. Furthermore, I know that if I have made an error in my research, I have enough portfolio backstops in place that the position will eventually be decreased and even eliminated entirely.
Diversification is a tool for the uninitiated, reluctant and indecisive. Buy an ETF.
