There comes a time, happily so...I might add, when an investment does well and a thought formulates: this is ~25% of my portfolio...should I trim? I’ve started to wonder, dare I say ‘worry’, because the market cap has risen faster…much faster….than the business’s fundamentals. Much of 2020 and 2021 has seen this happen to various businesses but when I see the price trading at some 50x gross profit…I worry.

This struggle was well enlightened by Sanjay Bakshi’s outline of the paradox of one’s mentality as a buyer vs. holder of an investment through something a trader had told him:]

“…..holding on to a position is the functional equivalent of selling it and immediately buying it back (ignoring transaction costs and taxes). And so if you’re not a buyer anymore of a position you own, then you should be a seller.”

This does seem too binary and to the shades of grey that surround investing, Bakshi's reference to Ben Franklin seemed appropriate.

“Keep your eyes wide open before marriage, half shut afterwards.” - Benjamin Franklin

But is it right to turn a ‘blind eye’ for some things? Maybe it’s an attitude towards being patient with the management team one is investing in or maybe it’s a view of compromise one adopts from learning more and more about the company from owning it over the years. After all, if one is owning a business over a long time, one should get more and more familiar with its strengths and weaknesses.

Here is the odd part. Divorces are messy. But selling a stock is not. It’s one of the advantages of being in the private markets vs. public markets. The ability to change one’s mind and act on it. This doesn’t mean that one fault by an investment should mean immediate axing. Everything is a case-by-case basis. But, if the overall premise is to think of investing in a business as a marriage and that means letting things go….I don’t think that is sound for a particularly concentrated bet. I could see it being a model to adopt for a 100+ position portfolio like Peter Lynch’s and Phil Fisher’s (he advocated less than 20 in his book but I think he had hundreds in his portfolio by the time he died).

And therein lies the dance with conviction, fear, and everything else in between. I’ll borrow from what Bakshi recorded from his conversation with Charlie Munger:

"Psychologically, I don’t mind holding a company I like and admire and I trust and know that it will be stronger than now after many years. And if the valuation gets a little silly, I just ignore it. So, I own assets that I would never buy at their current prices but I am quite comfortable holding them.”

Munger has historically advocated for a concentrated portfolio of 2-5 on various occasions. Buffett advocated something similar too for small investors. Now, I can’t say that such low single-digit concentration is the key to great stock returns. Folks have achieved great returns with dozens of stocks in their portfolio. Rather, the rule is that there are a small number of investments that can provide phenomenal returns over a long time and that is correlated with investors identifying them, investing in them, and holding them over such durations. It sounds ridiculously hard….because it is.

Therein lies a dance in the portfolio. The tradeoffs of opportunity costs, conviction masking some arrogance, and inability to identify the fool within the self. The dance that might see a 5 stock portfolio become 25 or the other way around. To each their own, but I’ve lately been asking myself if I should take my cost basis out of investments that have had great runs. I should emphasize that this is a scenario for companies that I think have a long runway with stellar management but there is the opportunity cost I consider with short-term price run-ups where I can probably find more enticing opportunities. The argument might be ‘oh then should you not sell your existing position?’ To which I say ’no’ because that indicates a general form of market timing that seems rather difficult and a more difficult mental hurdle of not being able to buy back in at a much higher price in case I am wrong.

Taking profit off the table might actually let my mind relax and prepare for any right tail events. That’s my thinking. It’s like when I play blackjack and once I’ve made my principal back, I hold that off and only play with my winnings. It might be sub-optimal but it lets me play on with the money I have. Such a method of continuously selling half whenever a stock doubles might actually let me ignore it and let it run. To let me keep my eyes ‘half shut’. This might be how I limit permanent impairment of capital whilst preserving the upside via right tail events for the companies that I truly think have a long runway.

Now, could such a diversified fund truly deliver outsized returns? It’ll be hard and it’s also true that there really aren’t that many wonderful businesses out there. But this might be the approach the lets a person like me continuously look for new ideas while letting past ideas run along. The point of the diligence might be to let the company come into the portfolio fold and so that I have enough conviction to hold on for at least a double before taking profits and letting the rest move up. The question is then: how big should the initial bet be? At the moment, I don’t know.