Podcast: Too small to matter

Simon BrownJSE Direct, Latest

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Simon Shares

  • NO show next week (18 Oct 18), I am holidaying.
  • Remember the chart of the Top40 I posted a few weeks back, showing the trading range? We broken the range again, but this time to the downside and we’re down almost 15% off the November 2015 highs. Not the end of the world, yet. We do however need to bounce back into that range ASAP.
Top40 chart daily 10Oct18

Top40 chart daily 10Oct18



Too small to matter

Portfolio construction is way more than just deciding which stocks to buy or sell. It’s also valuations, about asset classes and position sizes.

The first question is how much of my portfolio should be passive, how much active (your own DIY investing or an active manager) and how much for trading? I always state that passive should be a minimum of 50%, this protects us from the follies of trying to beat the market either ourselves or with a supposed expert. The more we put towards passive the more certainty that we will at least match market return. Now sure we want to get rich quickly so we want to beat the market, trounce it. But the truth is that this is hard with the professional active industry seeing only some 15% of active managers beating our market.

Once we know how much (if any) we’re putting into active we need to decide how this will work?

  • An active fund manger or DIY or combination of both?
  • How will we select the active manager or fund and how will we measure (and potentially fire) them?
  • What about trading? Geared, ungeared? Equity or indices or FX?

Then we need to start deciding what shares we want to own. This process is slow, not only in the selection, but then also in the waiting for the prices that we want to buy at.

What is also very important here is how much of the share we should be buying. Any share needs to have a chunky enough size to be material but not so large that it could be catastrophic. I hold 10-12 individual shares within the 40% of my portfolio that is set side for my own active management making each share around 4% of the overall portfolio. With growth some shares may in time become more chunky and then I stop buying and in time may even have to sell down the position to avoid being over exposed.

I also need to monitor what’s in my passive investments. For example Naspers (JSE code: NPN) is very large in Top40 ETF (except the equal weight ETF from CoreShares) so adding some active Naspers makes you likely over exposed to the stock.

But there is another issue, position sizes so small as to be meaningless. I often see a stock sitting at under 1% of a portfolio. Now even if this stock doubles in value it’ll only add 1% to the overall portfolio.

Yet it is taking as much effort to select, research, read results, valuing and transact as a full size position. So same work but for less reward.

These small positions are sometimes dogs that have collapsed and investor is unwilling to sell in the misguided belief that one day it will return to its glory (spoiler alert – it won’t, Sell the dogs).

But at other times they because of a lack of conviction. You want to own the stock, it seems hot and everybody is talking about it and you’re afraid of missing out but you’re also afraid of the risks. So you take a small insignificant stake to serve both fears. But investing is about conviction. Either like a stock and give it full weighting or don’t buy it. No half measures.

Another potential reason for the small fry is legacy. Every portfolio starts small and when starting out we often buy stocks that in years to come we’ll look back and wonder why we ever bought them. Yet there they sit, small and insignificant.

In all cases small fry must be dealt with. Either increase the position to a meaningful size (waiting for the right valuations) or sell it. Don’t keep a stock that has no significance in your portfolio.


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JSEDirect is an independent broadcast and is not endorsed or affiliated with, nor has it been authorised, or otherwise approved by JSE Limited. The views expressed in this programme are solely those of the presenter, and do not necessarily reflect the views of JSE Limited.


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