What is Portfolio Management anyway?

When to Sell: A Workshop with Ellis Traub

Session 1

What is Portfolio Management anyway?

Around the end of last year, a few of us were asked to contribute a list of five stocks we thought would be good investments and to comment on the reasons we thought they would be. I did so but, unfortunately, I got so wrapped up in other things that I forgot all about them. So I’m in the embarrassing position of having to lead this discussion off with the admonition, “Do as I say and not as I do!”

In any event, the best I can hope for is a) you’ll accept this as an example of why you should pay attention to what’s ahead, and b) I’ll be able to demonstrate in the months ahead how you can greet such a challenge and turn things around. That disclaimer out of the way, let’s get at it.

Although most of the fun of investing surrounds the acquisition of your stocks, the fact is that buying them is only a half of what investing’s all about. The other half—for a variety of reasons we’ll discuss in a moment—is considered by most of us as being pretty much of a drag! Yet, there’s as much or more potential benefit is to be derived from managing your portfolio as from buying the right stocks in the first place.

What I intend to do in the next few days is to address all the reasons why we don’t do it very well—if we do it at all—and to expose those reasons for what they are: insufficient excuses. In the next five lessons, I hope to make it clear that we no longer have a leg to stand on for not doing what we need to do; and, with any luck at all, I might even persuade you it can be fully as much fun as the stuff we do to select our companies for investment.

You know, just the term, “Portfolio Management,” is pretentious …almost intimidating. It suggests that we have to put in hours of dedicated and tedious work, and it suggests that it’s much more complicated than it really is. So let’s set the record straight here by first understanding what Portfolio Management really is; and start that process by explaining what it’s not.

Portfolio Management is definitely not Portfolio Tracking. If you think that regularly looking at our portfolios to see how the prices are doing, and whether or not they’re making money, is managing our portfolios, fuggedaboudit! Portfolio tracking, at best, is merely checking to see how good or poor a job of managing our portfolios we’re doing. It has nothing to do with the actual task of managing our holdings. In fact, as you’ll see down the road in this workshop, portfolio tracking can be one of the more insidious things that can work against sound portfolio management.

No, Portfolio Management is a pro-active activity that requires a certain amount of discipline and dedication. Its purpose is simply to catch our losers before they damage our portfolios’ performances, and to maintain our average estimated return at as close to 15 percent as possible so we can meet our objective or doubling our money every five years.

When an issue seems complicated, what’s the easiest way to cut it down to size? It’s to break it down into its smallest parts. In this case, that’s easy! Once we own a stock or stocks, there are only two things we can possibly do with them: either hold onto them or sell them.

Since we already hold them, we are left with only one decision to make; and that is simply when to sell them. So Portfolio Management is nothing more than making that determination: when to sell them. That’s all there is to it!

More than “when,” why we would sell them is the important issue. As long-term investors, the most important thing that distinguishes us from “the herd”—those who trade or try to make money in the market in the short term—is the definition of “long-term.” We buy stocks not to hold until they reach a target price, not for a month, not even for five years. We buy them to hold forever! …unless—and here is where I can go another step further in making it simpler for you—unless one of three, and only three, conditions come to pass:

1. We want or need the money,
2. The Quality deteriorates (Defensive strategy: SSG Sections 1 & 
3. The potential Return deteriorates (Offensive strategy: SSG Sections 3 – 5)

Indeed, these are the only three conditions that would warrant your selling a stock.

So, “When to sell” (Portfolio Management) means watching our holdings to see whether any of them meet conditions 2 or 3 in hopes that we can hold onto them until such time as we reach condition 1.

During the next five days, we’re going to discuss 1) all the excuses we have heard for not doing the job; 2) why you can no longer use them for excuses; 3) the basics of defensive portfolio management, 4) the basics of offensive portfolio management, and 5) the tools we have at our disposal to make the task even simpler.

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