PORTFOLIO UPDATE: ALWAYS LOOKING STEPS AHEAD
During the trading day, I tweeted the following:
The liquidation of PXLW has nothing to do with the fundamentals of the company and everything to do with the lack of performance out of the name since I initiated the position in early August. My system for adding to and liquidating positions is based strictly on price performance. I hardly ever average down. I only average up. As the old saying goes: losers add to losers. A core concept that will make you a better investor the sooner you grasp onto it.
I think it is important for me to attempt to demonstrate how I am thinking about the construction of the portfolio at this exact juncture in order to understand my decision making here. I am right at the 75% invested of equity mark. By next week, I may take that back up to between 90 to 100 percent invested in some new names.
The month of January has brought with it a slight drawdown of a little less than 2% for the portfolios. Those of you who have been following along know that I have a number of risk cushions in place that serve to smooth out my equity curve for my own sanity and for the comfort of my investors. While I believe in my ideas wholeheartedly due to the research and understanding behind each one of them, I also believe in the fact that downside momentum in the market has a way of making even the best ideas turn into chopped liver. Each one of my risk cushions acts as a preventive barrier that keeps the portfolios from giving back an amount of equity that will cause me to take excessive risk in order to make up for the shortfall. I don't ever want to be in a position where the portfolio determines my course of action. Every step is pre-planned well in advance.
As an example of pre-planning, the near 2% drawdown I am facing this month puts a halt on any new portfolio positions until the drawdown gets to the point of being less than 1%. At that point, I will consider taking on new positions. The reason for this precautionary measure is due to the fact that I have another risk cushion at the 5% drawdown mark for the month. If, during any single month, the portfolios lose 5%, I cut exposure in half. This is, by the way, supplementary to my trend indicators which are a means of cushioning general market risk.
If I am 300 basis points away from the 5% drawdown point (where I am now), it makes no sense to accelerate volatility, taking the chance of having all the positions in the portfolios halved. My goal at this point is to tame volatility as much as possible so I do not have to encounter this safety net.
It comes down to a very simple philosophy of pushing the envelope while you are ahead and pulling back significantly when you are not. That is the core of my allocation strategy. It is as simple as can be, yet can yield results that can work wonders in your portfolio if backed by an ability to pick winners AND allow your profits run.
Portfolio holdings as of the close today: PRXI, WMIH, SPNS and UPIP.
That's all for tonight.
