While my previous long bias remains, the recent market weakness after a strong October has finally given me pause. I had been insanely long (using significant margin) up until today because there were continual buy signals (technicals, insider buying) which lined up with the businesses and valuations I liked (durable competitive advantage/roe at less than 25 ttm earnings).
The business thesis for most of these investments remain, but my portfolio has simply gotten too large and often leads to a fundamental issue of my approach. A stock that falls is cheaper and often a better buy (value), but persistent weakness is often a signal of worse things to come (momentum). My bread and butter approach is to find businesses which I would like to buy as they get cheaper, but wait under the trend turns (or at least stabilizes) to prevent a Bill Miller-like 2008.
The corollary to the above then, is to not hesitate to cut positions when the trend turns or weakens, even if an investment has not reached what I believe to be fair value. This has happened now with HLSS, VOYA, AIG, (some of the largest positions) and have I reduced. I had recently added to HLSS on weakness because 1) the weakness was not panic-driven and 2) there was a nearby catalyst that could reverse the trend (earnings). The earnings driven pop has now weakened, so I have reduced the position to more manageable level, especially given the lower returns which I now believe is reasonable for HLSS.
As for specific numbers, I use a variation of the kelly criterion, described by another well-known blogger and money-manager.
*My approach remains value + trend-following, for the
long-term. While minimizing activity is a goal, position-sizing and
risk-management is necessary to ensure the portfolio can take advantage
of long-term views.
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