The portfolio held 70 stock positions… and I had no clue about most of them. I had inherited US$125 million in dozens of shares from a previous portfolio manager, and I hadn’t yet gotten up to speed on them
I knew that I wasn’t “holding” these positions. Being handed over the reins I was effectively “buying” them… every moment that they were in the portfolio, I was “buying” them.
Check out our H2 hedge fund letters here.
It was one of the most important investment lessons I ever learned.
Would you buy your assets again – today?
Around 12 years ago, I became the manager of a US$125 million hedge fund. The fund had been around for three years. The portfolio manager I was taking over from had put together a diverse portfolio of stocks, bonds, currencies and options across a dozen different markets and twice as many countries.
Each position — that is, every asset that the fund owned — had a history… a narrative, and a reason that it was there. It might have been because a stock was cheap, or the company’s management was fantastic, or a big dividend was coming up, or that it was an unloved and beaten up stock that was coming back into favour.
On my first day on the job, my boss told me, “I’d like you to look at every position in the portfolio. Learn the story, assess the valuation and understand why it’s in the portfolio. And then ask yourself if you would buy it today, right now. Because by having it in the portfolio, that’s what you’re doing.”
At first, I didn’t understand what he meant. A stock in the portfolio was a holding… so the portfolio was, well, holding it. It had already been bought at some point in the past. I told myself I wasn’t the person responsible for the stock “being bought” now — someone else already had.
But he was right. Every position was taking up capital — actual cash — of the fund. If that cash wasn’t being used for that position, it could be available to buy a different security. There was an opportunity cost associated with every holding. And by holding a position I was really “buying” that position — each and every day that it was in my portfolio.
This also makes sense outside of a stock portfolio
Think of what you own — all of your assets — and ask yourself: “If I had the cash in my hand to buy this right now, instead of the thing itself [whether it’s a stock, a bond, a house, or a car], would I still buy it right now?”
Sometimes you don’t have a choice. You need a place to live, so dreaming of what you’d do with the cash you’d receive from selling your house right now might be irrelevant. And your old car might not be worth much, and you can’t compare its current value to what you bought it for when it was new.
But you may own other assets that, if you could do it again, you wouldn’t buy. You might be able to get something that works better, suits your needs better, or something that’s just a better color or style. In the case of stocks or bonds, you might be able to put the money towards a different stock that has a better return potential or that pays a bigger dividend.
Every day that you’re holding onto a loser – whether it’s a stock that’s down, or an item that you don’t use or don’t need anymore – you’re using valuable capital that you could put to better use. Each day you own that asset — boat or stock or wheelbarrow or ring — you’re using money to own it, money that could be used for something else.
That’s why every day you are “buying” whatever you already own.
I learned the stories of the 70 securities in the portfolio. I ended up selling about half of them to free up capital to buy other assets that I felt good about “buying” every day.
Good investing,
