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Option1307 (29.92)

How Much is Too Much?

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March 25, 2013 – Comments (10) | RELATED TICKERS: MDC , PHM , TOL

Is too much of a good thing a bad idea? Is there a limit on too much goodness…?

I’ve usually tried to keep my portfolio reasonably balanced over the years. I typically have ~15 stocks spread out over a several different sectors, an ETF or two, and some cash on the sidelines to be deployed at the opportune moment. I’ve never really set a specific limit on each individual position size; however, they tend to be roughly 2-5%. I’ve always felt that diversification is important, but I will load up on a sector if I feel strongly about it and its future potential and I have never really limited my sector position size either.

With all that being smy sector positiion portant, but I will load up on a sector if I feel strongly about it and it'aid, recently I’ve been debating if I need to implement a position and/or sector limit.

I’ve strongly believed in homebuilder stocks for the last 2-3 years now and began buying heavily in 2010 and again in 2011. Things were rather bumpy for the first year or so, but things have finally taken off the last year. This is great news and I’m obviously very happy with the returns I’ve generated. However, it has brought up a different issue, an issue that I am happy to have, but an issue nonetheless.

One of my favorite homebuilder stocks is MDC. An extremely well run builder that was buying land as fast as it could early post RE collapse when deals were to be had. It also paid out a nice dividend while you waited out the housing storm. MDC has finally started to show positive signs of life, turning a profit in 2012.

With that being said, MDC has become one of my largest holdings and now makes up almost 10% of my portfolio. As I stated above I’ve never really set limits on my position size, but this is starting to make myself rethink that strategy.

My basket of homebuilder stocks has also been growing to a slightly uncomfortable size. The sector now makes up ~20% of my portfolio. Again, I’ve never really considered placing limits on sector bets. I’ve certainly placed several in the past, but they never have become this big before.

I‘ve been reviewing my homebuilder stocks and the sector in general lately and still feel confident in them (I’ll try and post some thoughts this week). So I don’t necessarily want to sell any of them, nor do I think I ultimately will. I am just thinking out loud her and wanted to hear other opinions.

I believe in diversity and think it is always a good idea; however, if you feel strongly in something there is nothing wrong with placing a large bet to back that up. I guess that is my justification for holding such a large position in this sector.

So what do you say Fools, do you limit your position sizes? Limit the amount of your portfolio in one sector? Thoughts?

 

10 Comments – Post Your Own

#1) On March 25, 2013 at 11:44 AM, awallejr (81.03) wrote:

It is difficult to answer without knowing all your specifics.  Generally diversification is more of a defensive strategy, one to minimize risk.  On the other hand if you are trying to hit it big concentration would be the goal, but you will live and breathe that pick everyday.

Knowing when to get out is also tricky.  Just look at AAPL.

Personally I am less concerned about sector diversification than I am about individual picks. 5% to 10% tops if I really like the pick.  I am heavy MLPs, BDCs and REITs mainly for the yields and tax treatment.  Also MLPs generally have  low betas so they tend to anchor my portfolio's volatility.

I think your housing play has more room to run, QE and an improving unemplyment rate should continue to put wind in their sails, just be mindful that corrections can make your portfolio bleed red harder.

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#2) On March 25, 2013 at 2:37 PM, Option1307 (29.92) wrote:

Awallejr

Thanks for the thoughts.

I wasn't looking for specific advise, I'm more just curious as to what others do in their own portfolios. Seems like we are roughly on the same page in regards to trying to limit individual positions to 5-10%.

I have quite a few REITs in my portfolio as well. I agree that yield is key right now.

"I think your housing play has more room to run, QE and an improving unemplyment rate should continue to put wind in their sails, just be mindful that corrections can make your portfolio bleed red harder."

Agreed. As I mentioned in my post, I don't really think I will do much, if any, selling of my home builder stocks as I do feel like they have more room to run as well. You point out some good points in the above paragraph. 


 

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#3) On March 25, 2013 at 8:22 PM, HarryCaraysGhost (99.73) wrote:

Hi Option, I can tell you what I generally do with my portfolio, not that I would reccomend anyone else trying it.

I try to keep the majority of my money in my best and relativly safe stocks. At one point I had about 50% of total portfolio in Visa. Since I've been adding to a KO drip (and other smaller posistions) the mix is more 25%Visa 15% Coke, but Ko is gaining ground.

Now as far a limiting my expousure to more risky stocks, I always had kept a 10% portion on a basket of speculative stocks (any stock trading below $10) This worked out great for awhile 2009-2011. Whenever I would exceed 10% I would move the profits into my long term holdings. But then I lost quite a bit of the 10% (bound to happen eventually, thats why it's called speculation).

So now I just stick with dividend payers. (have to admit it was a fun ride though:)

Cheers.

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#4) On March 25, 2013 at 8:33 PM, Option1307 (29.92) wrote:

Harrycarys

Appreciate the thoughts, that's what Caps is all about!

I understand your desire to stay in long term/dividend holdings,that is never a bad idea. You won't make a killing that way, but I would argue that people underestimate the power of compounding dividends over the long run. They can certainly add up.

Seems like you are fine with having large positions when you feel confident in them, that's good to hear. I'm not sure I would ever have half of my portfolio in a single stock, that's a lot of conviction, but I commend your courage and Visa is a good stock to pick. (I never was able to pull the trigger on it but its done well for me on Caps.)

I'm not sure if you are suggesting homebuilder stocks as "speculation". I agree they were/are more risky and tend to have higher betas, but i would never classify them as speculation. They do have a certain rationale behind them whether you think I'm crazy or not, it's there I promise ;)

Thanks for the thoughts! 

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#5) On March 25, 2013 at 9:16 PM, HarryCaraysGhost (99.73) wrote:

I'm not sure if you are suggesting homebuilder stocks as "speculation". I agree they were/are more risky and tend to have higher betas, but i would never classify them as speculation. They do have a certain rationale behind them whether you think I'm crazy or not, it's there I promise ;)

Oh, not at all. I actually like the homebuilder sector here, and anticipate the shares going higher. I would never call them speculative.

Seeing them rebound makes me very happy as I'm in a construction related buissiness. That's what needs to happen for the economy to recover IMO.

I was just using examples from my own portfolio.

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#6) On March 25, 2013 at 9:26 PM, Option1307 (29.92) wrote:

I would never call them speculative...I was just using examples from my own portfolio.

I understand now, that makes sense.

I actually like the homebuilder sector here, and anticipate the shares going higher.

I agree that the shares have more upside to go, in fact I think there is actually quite a bit more potential even after the amazing runs they ahve had the last year. However, with all that being said, I'm not sure I would be a buyer of homebuilder stocks here. They aren't nearly as cheap as they were back in 2010-2011. 

I'll try and write up some thougthts on them this week, time permitting. 

Thanks again!

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#7) On March 26, 2013 at 3:27 AM, valuemoneygreen (84.80) wrote:

100% long WFC. Diversification is not for me. It just hinders my gains. Feel free to read my pitches the comments made on my caps page. Especially the ones for WFC and SYY. That is how I look at investments. My valuemoney blog explains the profile of valuemoneygreen caps page. Love to hear other peoples thoughts on things too so feel free to stop and comment.

As far as the homebuilders go as a whole? I think at current prices the sector is overbought. And I agree with your comment # 6.......I'm not sure I would be a buyer of homebuilder stocks here. They aren't nearly as cheap as they were back in 2010-2011

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#8) On March 26, 2013 at 8:54 AM, JohnCLeven (76.20) wrote:

Do you limit your position sizes?

I'm still pretty new to investing (only about 2 years) so take everything I say with a  grain of salt...

That said, I agree with Charlie Munger who has said "Excessive diversification is madness." About 75% of my portfolio today is made up of just 3 companies: BRK.B, MCD, and COH.

Less diversification will mean a more volatile portfolio, BUT if you pick the right companies, at the right prices, and have the right temperament...you should be able to do quite well in the long run.

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#9) On March 26, 2013 at 9:17 AM, Option1307 (29.92) wrote:

Valuemoneygreen and JohnC

Diversification is not for me...

I agree with Charlie Munger who has said "Excessive diversification is madness."...

I've heard this quote before many times and somewhat agree with it. Essentially if you feel very strongly about a certain pick and/or sector there is no reason to not be heavily allocated to that position.

However, I still do think some diversification is necessary and a good idea as it will protect you from unforeseen circumstances etc. Even if you are spot on with your analysis, there is always the chance of freak accident, external factors, or government intervention recking havoc on your stocks. Think BP oil spill, Japanese tsunami, Lehman brothers, etc. etc.

I'm fine with betting big on certain sectors, lowering my divesrsification, but I still feel like you should spread around you cash into different holdings. At least for me personally it makes me sleep better at night.

Thanks for the thoughts!

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#10) On October 03, 2013 at 4:57 PM, TMFEldrehad (100.00) wrote:


If I still have confidence in an investment I won't pare it back, regardless of how big a portion of my portfolio it constitutes.

Sure, there's a risk that one of my (hypothetical) 5-baggers might fall on hard times and I would have been better off reducing the postion and balancing the portfolio. 

There's also the risk that, if I were to pare it back, my 5-bagger could go on to become a 10, 20, or even 100-bagger over time.

I think it depends on the investor, and which of the risks he or she is more comfortable assuming, but again, for me personally, if I still have confidence, I don't allow portfolio balancing just for the sake of porfolio balancing to determine which positions I might reduce.   

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