Continued Concentration In The Top Ideas

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The other thing that I’m sure many of you are aware of is the collapse of the Francis Scott Key bridge in Baltimore after it was hit by a container ship. I’ll leave it up to readers to decide if it was foul play or an accident, but this blocked Consol Energy’s export terminal in Baltimore. Shares of Consol bounced yesterday after a selloff on Tuesday. It will be interesting to see how this impacts them over the next couple quarters, but the bridge collapse will have an impact on a variety of different transportation lanes. Elsewhere, I’m pretty optimistic about the coal and oil sectors heading into the summer and both have shown signs of life in recent weeks.

I joke about the daily move yesterday from some of the sectors I own, but it seems like the stocks in my portfolio have been taking turns punching me in the gut for a variety of reasons over the last couple months. We will see if we start to see some market rotation, but it seems like we are setup for a nice run for the rest of 2024. I have been busy over the last couple weeks, but earlier this week I had a meeting with the owner of the John Doe Portfolio, so I figured now was a good time for an update.

John Doe Portfolio

We have quarterly meetings to chat on what is going on with the portfolio, and he has graciously allowed me to write about it as long as I keep him anonymous. Believe it or not, he doesn’t enjoy talking about investments like I do, so we had a wide ranging discussion focused on current events, politics, and the chaos we see around the world. One of the main investment topics we discussed was concentrating the portfolio on what I think are the most attractive opportunities today. I think my best ideas have a much better risk/reward profile than some of the things already in the portfolio, so that’s where most of the new purchases will be focused.

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I’m not as concentrated in the John Doe Portfolio, but I have bought many of the same stocks that are in my own portfolio. The account has performed well and is up more than 15% since starting in early July ($541k to just under $630k). I’m optimistic about 2024, and I think we are going to get some opportunities to sell some of the stocks that have been held by the account for a long time to reinvest elsewhere. I think there are several fat pitches in the commodity space and I think that adding to those positions in coming weeks will give the John Doe Portfolio a good chance to outperform.

Before I get into some of the stocks that have been driving the performance of the portfolio, I want to go into some of the stocks I’m looking to reduce in the portfolio. For a quick refresher, I started running the portfolio in July of last year. The account was coming from another investment manager, and I sold all of the ETFs and mutual funds right away to reinvest. I have been trimming some of the individual stocks along the way, and I think I am done with most of the selling. With that said, I think there are a couple opportunities to lighten up on some of the existing holdings at good prices.

Stocks I’m Looking To Sell Or Trim

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I recently added a new client for a managed account with approximately $540,000 in the account. It is a transfer from another investment advisor, so there were existing positions in the account. I received the client’s permission to write about the account as long as I kept him anonymous. The account was invested in approximately 2/3 individual stocks, and 1/3 mutual funds and ETFs. I already sold all of the mutual funds and ETFs in the account, and I have been selling some of the individual stocks in the account as well. Some of the stocks have been held for a long time and have significant capital gains. We will be meeting later this week to discuss the plan going forward.

I would like to sell some of the stocks that I find overvalued, but that would lead to a significant capital gains tax bill. For example, the account has a large Apple position, approximately 14% of the account, with a very low cost basis (a little over $3.00). If I sold the whole position, it would create a large tax bill, which is something I would like to avoid. To be clear, having significant capital gains is a good problem to have, but it means that a good portion of the account is in stocks that find to be well above fair value.

Walking The Fine Line

On one hand, you sell all the stocks and incur the capital gains, with the assumption that the new investments will outperform the old ones, including the impact of capital gains. On the other hand, you could hold all of the stocks and assume that you could deal with a large drawdown that could have been avoided. I plan to find the middle path, where we sell some of the old stocks (but not all), so any drawdown from overvalued stocks doesn’t have such a large impact.

The discussion next year I would like to avoid looks something like this: Hey, I’m your new investment advisor, here’s a massive tax bill from capital gains in my first year as your advisor. It’s not a great way to ingratiate yourself to a new client. Walking the middle path makes more sense. Here is what I sold, here is what I bought, and we do have capital gains, but the new investments are performing well and will offset the tax hit in 2024. I plan to provide trade updates and portfolio weights once things are up and running, but I plan to track the account value and how the account is doing. The purpose of this will be to provide an idea to prospective clients on how I might manage their account and deal with their investments on a personalized basis.

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Commissions & Management Fees

One of the things that frustrates me with many investment managers is their fee structure. Some charge a percent of assets under management fee, others charge commisssions, and some charge a performance fee (the advisor collects a percent of anything over 10% for example). A lot of managers have a combination of the above. For example, hedge funds are infamous for their 2% of assets and 20% of performance structure. Others charge a percent of assets and a commission fee.

I decided I will be sticking with a pure percent of assets as my fee structure (0.6% annually). If the account balance increases, I make more as the investment advisor. If the account value decreases, I will make less as the investment advisor. I don’t charge commissions or a performance fee, so my incentives are lined up with the client. My goal is to increase the account value over time, and I don’t have any reason to churn the account or chase performance like other advisors.

Plans For The Account

I have already been investing some of the proceeds from the mutual fund and ETF sales into a couple sectors. I have been buying Petrobras, Ecopetrol, and Peabody Energy, and I plan to buy offshore companies like Transocean and Tidewater on pullbacks. I will also be adding other sectors that I haven’t written about yet, including stocks in the tobacco industry and a couple different Real Estate Investment Trusts (REITs).

While I’m fine being concentrated for my own portfolio, it makes sense to be a bit more diversified for a managed account. It won’t be a hard limit, but I don’t plan to put more than 10% in any individual stock and 30% in a sector. The actual amounts will vary, but I still think it makes sense to overweight certain sectors without putting an irresponsible amount of someone else’s money in one idea.

Conclusion

Hopefully this will provide readers with an idea of how I would manage their account if they are interested in a managed account. I think that Wall Street and other investment advisors have taken advantage of investors through egregious fees without providing outperformance. My goal is to build a portfolio with an attractive risk/return profile without charging ridiculous fees. I will provide updates on the portfolio, its performance, and I think readers will be interested to see a real money managed portfolio and its results. You should be able to get a general idea of how I manage money and my contrarian investment approach.

If you have any questions, feel free to reach out with any questions on the portfolio or my investment strategy.