selling a stock (i): super-sized position

what is super size in an equity position?

Let’s take an extreme example.  Say an investor does an asset allocation plan in mid-2003.  He decides to put 10% of his equity money into AAPL and the rest into an S&P 500 index fund.  He holds until the end of 2007.

What does his equity portfolio look like then?

AAPL has gone up 2000%;  the S&P has gone up 18%.  So his portfolio has become 65% AAPL and 35% the S&P.  In other words, he no longer has a portfolio of stocks.  He has a position in AAPL (which is giving a big shot in the arm to his wealth) plus bells and whistles.

what’s wrong with that?

The potential problem is that, although a good part of the investing game is to make as much money as possible, another important consideration is diversification–or protecting yourself against achieving a very bad outcome.  Having all your eggs in one basket is okay–unless/until the handle breaks and the eggs fall out.

In addition, sadly, not every stock is an AAPL.  For every AAPL, there are a ton of NOKs or BBRYs.  Suppose you pick wrong.

Also, the reality is that most growth stock rocketship rides last about five years.  After that, either competitive response or technology/fashion change halts their advance and most times sends them plunging back to earth.

The best (a small subset) of these high fliers can reinvent themselves once or twice and thereby add additional time to their fast growth days. AAPL, for example, was the iPod company in the early 2000s and the iPhone company in the second half of the decade.  But eventually even the most creative runs out of fuel and morphs into the equivalent of present-day MSFT, WMT or CSCO.

how much exposure is too much?

A lot depends on an individual’s age, financial situation, risk tolerance and willingness to pay almost obsessive attention to any large positions.

As for my personal approach, I consider myself to be an aggressive investor.  Still, most of my equity money is either in passive products or managed by others.  My largest position is around 6% of the total–and it’s in an industry I’ve been following for over twenty years and is spread over several companies I know very well and whose operations/stock prices I watch daily.

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