Position Sizing for Beginners; Selling -50% Losers

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1:56tuned in to the Investing for Beginners podcast. Led by Andrew Sather and Dave Ahern. Step-by-step premium investing guidance for beginners. Your path to financial freedom starts now. Starts now.

2:17All right, folks. Welcome to Investing for Beginners podcast. Today, Andrew and I are going to read a couple of listener questions we got recently. So these are a lot of fun and we're going to talk about a variety of different things. So buckle in. Here we go. I got, hi, Andrew. I've been investing since November of 2024. So I'm just learning about position sizing. When I look at my positions and fidelity towards the right, there's total cash and total percentage. To me, it makes sense to invest more in the position that are doing the best over time. Do I go by the total percentage or total cash?

2:52Or am I completely wrong and just DCA or dollar cost average into all positions? Also, should I invest it all in negative positions or still DCA into them? Thanks. So great question. And I guess I'll let you take a first volley. Sounds great. Smack it over. I see a common theme in both questions. I got to cheat and look ahead, but we really want to focus this is going to be the theme of the episode focusing on the business this is super awesome you just started justin i am happy you're playing the right game we are happy to have you here i think you will find it very worthwhile to be saving and investing and building a portfolio like you are position sizing is definitely one of those things once you have a couple stocks in your portfolio you realize oh okay maybe this is something i should look into.

3:45So looking at total cash and total percentage when you're looking at which stocks have gone higher, that's definitely a good way to look at it when you're checking your brokerage account. What I would say though is, I don't know, maybe you're not a spreadsheets guy. I like spreadsheets. I like having my portfolio on a spreadsheet. Fiscal AI, if you're not a spreadsheets guy, has a really nice dashboard where you can put all your stocks in there. But you really want to look at your portfolio as a pie. And so how big is each part of that pie? Do I have four stocks and it's 25, 25, 25, 25? You want to always look at the percentages and try to base your decisions based off of that.

4:30And I know the question's kind of more veering towards how much has my stocks made in the market. But when you're thinking of portfolio sizing just in general, and as that's evolving for you over time, I believe it's important to know what your percentages are and have that kind of ingrained and have that help you as you make decisions. Because those things can make a big impact. I mean, something that 7.5 % is three times bigger than something at 2.5%. So those moves in that stock are going to affect your portfolio three times more than the smaller position. Those percentages can help a lot if you stay on top of them.

5:15And again, fiscal.ai has a great dashboard where it can do that for you automatically. But stay on top of those percentages and use that to help you kind of make your decisions. Yeah, I agree with that. I think that's a great viewpoint. And frankly, that was something I didn't understand at first when I first started investing, I didn't really get that whole position sizing idea and the fact that you have a bigger position in one company versus another, how much that can skew your returns of the portfolio. If the company that's a lot smaller is doing a lot better, it has less impact on the portfolio.

6:02And to put it in perspective a little bit, maybe not apples to apples by any stretch. Ours, portfolios to like a Buffett's, right? But that is a big reason why he sits on so much cash. You and I, I'm talking Andrew and I and all of our listeners, we have roughly 5 ,000 to 7 ,000 different equities we can invest in globally. And so there are a myriad of opportunities for us to invest in. And large, small, anything in between. Warren Buffett, because of his size, to get something that's going to make his portfolio move anything, like if he buys a position in a company and it's 0.05 % of$350 billion investment portfolio, it's not going to do anything, right?

6:51So why invest in – that's why he doesn't buy some of these microcaps, and that's why microcaps and smallcaps have such a wide range of retail investors in them because a lot of the institutional investors are too big, and they can't buy them because even if they buy the whole company, it's such a small part of the pie, it won't move the needle. And so Buffett really only has, I read somewhere, 125 to 150 companies he could invest in that will move the needle. And so when you get to that small of a target, a focused target, it's a lot harder to make decisions. It's a lot harder to find opportunities, and it's a lot harder to make decisions.

7:34We don't have that problem. But the same rule is if you have a$10 ,000 portfolio versus a$1 ,000 portfolio, you make what you choose to either reinvest in or add to the portfolio for the bigger one has a bearing on how well that goes. Like if you buy$50 of a company and add it to your$10 ,000 stock portfolio, not going to do much. But if you add$500 or$5 ,000, then that's obviously going to move the needle a lot more. And so you have to, the dollar amount does matter, but to Andrew's point, the percentages matter far, far more. I've held companies where maybe I have 75 shares of a company, but because they are$3 a share, it doesn't really add up to a lot in dollar amounts.

8:20And percentage-wise, it's even smaller. And you buy one share of Berkshire at$500 a share, that moves the needle a lot more. So you definitely have to keep and can see the side of the portfolio. I guess, can we touch on the second part of his question? Like, how do you choose which to look at the Peter Lynch idea of not watering your weeds? Like, how do you choose which ones? Are they the ones doing well or the ones not doing well? Yeah. I don't know if he ever said you should water your flowers. He just said, don't water your weeds. Right. I would like to actually volley it back over to you and hear your thoughts on this whole idea.

9:06So, yeah, this is a question I struggle and have struggled with. I have traditionally been an average in when they're down idea. And that has generally always been my philosophy. Like if I'm investing in, let's say Texas Instruments, right? Texas Instruments, I think we all agree is a great business. The financials have been meh over the last few years. The stock performance has been meh. But we all hope that on the other side of this meh is going to be some great stuff. And so I have taken opportunities over the years to add to that position. And because I feel like it's undervalued and there's still a lot of room left to run.

9:53and I don't know that I'm necessarily wrong in thinking that way but I've also been coming across a lot of people talking about this idea of averaging up our friend Brian Feraldi has talked about this I've heard Brian Stoffel talk about this I'm reading a book by David Gardner and who runs the Motley Fool he talks about this and I've seen other people talk about this as well and there is some math behind if you invest in Texas Instruments when it's doing really well and it continues to do really well, then when you buy it at point A and you look at it at point B, you could still have a good return.

10:31And Charlie Munger kind of alluded to this too, like you don't get in a way of compounding. And I'm paraphrasing here, but I think sometimes we focus so much, I think I sometimes focus so much on the downside and looking for things that are getting, air quote, beaten up because I still think they're great businesses. And then I try to buy down on them, but I think there could also be something to be said for maybe buying things that are going in the right direction as well. And I haven't done it yet. And I guess I'm still nervous about doing that. But it is certainly something, you know, I guess I have done it with Visa, but with other companies in my portfolio, I've been hesitant to do that.

11:11So I think that's something I'm definitely exploring. I guess, what are your thoughts on my thoughts. I've certainly done it too. Usually it's when the company has grown in lockstep with the stock price. I'm curious on the averaging up thing, because it's something we've kind of always danced around, but never dug into. So I think it'd be fun to dig into the weeds. Do you think company lifecycle plays a part in whether averaging up works? Do you think it would work better for certain businesses and certain life cycles. Yeah, for sure. I think, yeah, unquestionably, if you are, I am not of this ilk and I would say that Andrew is probably not of this ilk either.

11:54Like the earlier stage, not self-funding type businesses are generally things that we have avoided. Not that they're bad companies, not that they're bad investments. It just doesn't fit our style of investing. We're not comfortable with that. And so I have avoided those kinds of companies, where arguably those would definitely be ones that would be great to average up into. I think when companies are still in the optimizing profit stage, like Feraldi has talked about, I think those could be really good targets. Google, Visa, Microsoft, those companies could be really good targets for that. I think companies that are in the decline phase or are more in the air quote payout phase, i.e.

12:38they're spending most of their cash flow on dividends and or stock buybacks. So I'm thinking like a Coca-Cola or Johnson & Johnson, for example. Not that they don't have growth left in them, but they're certainly, they're on the better, they're in a longer tooth and on the other side of sustainable, attractive growth. I think averaging up into those kinds of companies, I would probably be, I don't know if the math would work. I'm not sure that that would math very well. That's a beautiful picture you just painted. I think you should hang it on the wall. It's hard to imagine Coca-Cola or Johnson & Johnson growing out of a high valuation.

13:21Whereas if you can pick the right growth winner, it's easier to see a company like that growing out of their high valuation. So I mean, that all totally makes sense. Yeah. I think there has to be two factors. For me, there has to be two things you have to consider. when you're thinking about the idea of averaging up. Not only do you have to consider where the company is in their life cycle, but you also have to consider how comfortable you are with that idea. Because typically, earlier stage companies are going to experience far more volatility than maybe Microsoft or Google will, for example.

14:00And so to invest in a trade desk, for example, I'm not saying it's a good or bad investment, but what I am saying is you're going to have to have a strong stomach because it's going to have a lot of volatility. And if you want to invest long-term in a company like that and you want to average up in a company like that, I think you're going to also have to have a very strong stomach and understand that you can withstand that and you can sleep at night and not stress about that. I'm not that. That's not me. I'm not that either. I'm too worried that a company will fail. Yeah. i'm not necessarily worried that the company will fail i'm just worried that i will overestimate my enthusiasm for said business and it will not perform as well as i air quote expect it to yeah the growthy graveyard is full yeah yeah i mean it's you know capitalism is is a is a brutal game and it's not for it's not for the faint-hearted and it comes for everybody at some and even stalwarts like GE and Kmart.

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17:56So, uh, hi, Andrew and Dave. One of the hardest things I faced with individual stocks is once after buying a stock, some end up going more than 50 % down and take a long time to recover. I buy after a lot of research and buy good businesses. Some of them that have gone down a lot are Wynn, SSYS, SLB, HAL. We're going to go through these, by the way. NOV, ALK, DVN, Airbnb, BABA, Boeing, and Baidu. All of the above are well-known and good businesses and have been held for more than three years. For example, SLB, they paid over$80 a share. Wynn paid$175, and BABA, the average price was$230. Each investment is at least$5 ,000 and some are$10 ,000.

18:45Holding for a long term, but these are struggling to get back. How can I avoid such a situation? Stop loss is not an answer since volatility in market, one would just end up selling and a stock can snap back and one would feel guilty. What selling rule should I have then? Like a hard rule, if something drops 50%, sell, or if I find a reason why it dropped, then either cut or add to the position. Thank you for all the knowledge sharing through the podcast. Look forward to hear further. I have been investing since 2000 and they have a few multibaggers as well. So fantastic question and congrats on the multibaggers.

19:19Yeah. Yeah. Multibaggers are always fun. Yes, they are. Yes, they are. So maybe we could touch a little bit on the kind of the mental framework about what to do if a company drops 50 percent. and then maybe we could go through some of the companies and maybe highlight some of the things why maybe we think they're going, why they haven't been doing well recently. And then maybe we could talk about what kind of sell rules we would have for these kinds of situations. Yeah, it is hard and it does test your conviction. And Dave and I talk about it almost on a weekly basis, how you got to stay long-term, you got to stick with your stocks.

19:59but man that does not help your emotions when you see a stock down it's it it takes a toll it can totally take a toll and it does test again your conviction and that's why writing it down like dave says over and over and over again is a really good way to do it because you can go back and remind yourself why you feel strongly about stock and hopefully when you're doing those write-ups, if you will, you are imagining pessimistic futures so that when a pessimistic future does come, you say, hey, I've already thought about this. A good example would be if you are doing competitor analysis and you are checking to see, do I believe this company is stronger than that company, stronger than that company?

20:47And is there a long-term basis for my opinion. When three months down the road, your stock drops 20 % and everybody in the news and on CNBC are all saying, hey, this company is losing ground competitively against this company. If you've done that work already, you understand that I have reasons to believe that the advantage they have over their competition is long-term rather than short-term. And so if you've done that work, you can go back to your write-up. You can read and remind yourself why you are confident about it. Again, it doesn't help in debugging a situation like this. I would challenge our listener here.

21:30I really love this question. I appreciate the transparency and the honesty and putting your neck out there to even write this is very courageous and I commend you. And you've been doing this a lot longer than I have. So I'm sure a lot of the things I might say you probably already are aware of. However, some of the stocks on this list, I think there's decent reasons why they would be down 50 % or more. And so I'm not trying to say, again, I don't know what your entire portfolio is. I don't know any of that. I'm just basing this off what you've presented to us. But if your entire portfolio is filled with stocks like this, I think a lot of these are a buying problem, not a selling problem.

22:15That's just my opinion, but based on the list here, that could be something. And so, yes, we want to have selling rules in place, but if you can get ahead of it and do some preventative maintenance, then maybe we can avoid a lot of these types of situations in the future. Yeah, for sure. I think the other thing to remember, too, is if these are, let's say that the listener's portfolio is 30 companies and these are the only ones that haven't done well in the portfolio you know yes maybe they're all down 50 percent or close in that range we also have to remember that not every i have losers in my portfolio of course i think andrew yeah andrew does i mean we all do and we're not going to bat a thousand We're not going to hit 100.

23:06We're not, you know, I think Peter Lynch said, what, 40 to 50 % is a pretty good range. Yeah, batting average in stock picking. And so one thing I would, I guess, caution people is when they look at their portfolio, we all look at it. We all judge our winners and losers by the framework of how well they've done and how much work we put into them. and it's natural to love the ones that are doing great and to not be a real big fan so the ones that aren't doing great but sometimes that's just the way the ball bounces when we're doing this. It doesn't mean we can't improve our systems and improve our thought processes and the way that we go about choosing what companies we want to put in our portfolio but we also have to understand that just because we think it's great the stock has no idea we're buying it and it doesn't mean that the stock market is going to have any sort of, oh, well, Dave bought it.

24:06It's got to be a winner. No, other than Warren Buffett, I don't think it really works that way because he's such a public figure. When he buys a company, everybody knows it. When I buy a company, nobody knows and nobody cares. But I think the point is that when you're analyzing your portfolio, beyond just looking for why these companies are losers and how can I handle this and what can I move beyond that, Also keep in mind that we're not going to have 100 % hit rate. And if you are, then maybe you're only picking three companies a year. Yeah, more power to you. But if you're a normal, air quote, normal investor and have some sort of activity, you're going to have companies that just won't do as well as you expect them to do, which is unfortunate.

24:50But it's part of the game. And it's always a valuable, valuable reminder. And yeah, let yourself really take that all in. And we can all do that, especially me. Yeah, I'll be all good. All right, let's look at this list of stocks because it's really interesting. The first thing that jumped out to me was we had three or four stocks, I think it's four, that were all in that energy space, the whole oil and gas. If they're not, there weren't majors necessarily, oil and gas majors, but they were part of that value chain. one of the things I remember hearing about on a podcast a while ago was talking about how you have cyclical companies commodities oftentimes fall into it and they all have different cycles and these can cycle in their own cycles rather than the economic cycles so you have something like semiconductors is actually cyclical which we've all forgotten but that's okay it is based on on supply fabs and the fact that fabs take a long time to ramp up.

26:03And so there is a decently predictable cycle if all the competitors are all acting the same way that you can kind of base off how long does it take them to ramp up and then oops, we have oversupply. And then how long does it take until some of those fabs close? And then you just repeat the cycle. For oil, I remember hearing on a podcast, it was something like a two or three year cycle. And I could be completely misquoting that, but there are definitely cycles in oil as well. And then you have geopolitical things that play a factor outside of even just supply and demand, or they influence supply and demand.

26:42But that is a hard game. And if you're an expert and you're good at pinpointing different, I can model out three different prices for Brent crude or something like that. and you know about all the jargon and barrels, barrel supply and all these things. If you can do all that and that's kind of your specialty, then yeah, it's probably not hard for somebody like that to make money. But for someone who's more of a generalist like me, that would be a very, very hard place to play in because honestly, I would never know where in the cycle oil would be at any given point. And so, yes, Exxon, Chevron, and all those businesses are wonderful businesses over the long term, potentially.

27:36They've had periods where they've been wonderful businesses. The cycles play a big, big part. And even if you are the best company in your industry, if your industry is in a down cycle, it's hard to make money. You hold long enough, ideally, those cycles will play out. But energy is also interesting because of the whole EV thing. So not only do you have cycles to worry about, but you also have potential disruption risk. Those are all things that I think make investing in energy hard. And it makes sense to me why they would be down 50 % because it could be a cycle thing. Yes, it very well could be.

28:14And along those lines, even if you're picking players that are maybe downstream from the majors or that are people that maybe are doing the drilling or maybe making the equipment for doing the drilling or the refining, even though they aren't directly involved in the production of oil and the processing of oil, if there's a slowdown, if Chevron and Exxon and the other BP and all these other people slow down in their production, then everything is going to trickle down into the food chain. And that applies to everything. We're talking about oil here, but the same thing will happen with semiconductors.

28:54Like Andrew said, it is cyclical. It will be cyclical again. It happened once before, it will happen again, kind of thing. I just watched Armageddon, so forgive me. so they it it will you just have to be aware of those things and that's one of the hard things about investing in particular industries like Andrew said if you're not intimately familiar with certain aspects of the industry that can be a challenge I'm not saying it's impossible and I'm not saying you can't learn a lot from it but it is something you have to kind of keep in mind and I guess the other thing is we don't we kind of have a sort of have a framework for how long They've held some of these companies, but we don't know specifically.