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- Extraordinary Companies portfolio is up 75%
Dear Investors,
We’ve reached a milestone, this is the 100th edition of the Rule of Acquisition.
It’s been fun and educational for me to write them. I hope that it has demystified investing a little bit for you and showed you that it is for everyone. You don’t need to be a finance wiz or a stock picker to invest. Investing can be as simple as buying an index fund.
ROA will remain quirky, simple and fun.
If you ever have a question or a suggestion, you are welcome to reply on email or get me on social media.
We finally rebalanced the Extraordinary Companies portfolio. Lets have a look at what we did and discuss a few portfolio management lessons.
The rebalanced portfolio
Portfolio performance
Winners and losers
Cheers! Here’s to the next 100.
The rebalanced portfolio
We rebalanced the Extraordinary Companies portfolio and here are the new weights:
Company | Weight (%) |
|---|---|
Nvidia | 22.1 |
Meta Platforms | 12.1 |
Novo Nordisk | 10.3 |
Taiwan Semiconductor | 9.8 |
Broadcom | 8.5 |
Berkshire Hathaway | 8.5 |
Microsoft | 8.1 |
Visa | 8.0 |
Mastercard | 7.7 |
KLA Corp | 4.9 |
We sold 55% of our Nvidia holding and about 40% of our Novo Nordisk holding. While that brought Novo down to a more reasonable weight, Nvidia is still a bit high at 22% of the portfolio. So, a bit more to do in future.
In terms of trades, we sold Nvidia at a profit and Novo at a loss. The main effect we were going for is rebalancing, but it doesn't hurt to implement a tax loss harvesting strategy at the same time.
Tax loss harvesting is where you sell a winner and loser at the same time to minimise capital gains tax. We talked about this strategy a few months ago here.
Portfolio performance
I showed you the porfolio performance last week (here), but this has been a good week so we're up a bit more. Here are the latest compound annual growth rates:
Extraordinary Companies: 15.3% per annum
World index: 8.3% per annum
A return of 15% per annum for almost 4 years is good, so no complaints.
Winners and losers
Somewhere in the back of your mind, you’re probably thinking that to be a good investor, you need to get every investment right.
That is not the case.
In the Extraordinary Companies portfolio, our ratio of winners to losers is 90:10. That means 90% of our stocks are up and 10% are down. Since there are only 10 stocks in the portfolio, that means everything is up except Novo Nordisk.
There is no rule about how many winners you need, but obviously, you want the most winners possible. The profitability of your portfolio is dependent on two factors:
The weight of each stock in the portfolio.
The size of the gain or loss for each stock.
It is easy to control the weight of each stock, that is just the amount of each stock you own. But it is also important to control the size of losses. A loss in stock with a high weight has a big impact on the portfolio’s return. You can control the size of a loss by selling a loser.
If you find selling a loser hard, remember what legendary fund manager, Peter Lynch, said:
“Most people water the weeds and cut the flowers when they should do just the opposite”.
Conclusion
Let’s end by talking about winners in the portfolio.
Our top 3 biggest winners are:
Broadcom - 98% gain
Visa - 54% gain
Mastercard - 48% gain
We bought these at different times, so the gains are not directly comparable. What I want you to notice is that the hottest stock of them all, Nvidia, is not in our top 3. It is actually number 4 on the list.
Nvidia has shot the lights out, but the fact that the stock is not our top performer illustrates why it is important to manage portfolio weights and have some level of diversification. Even amongst great companies, you cannot predict which one will do best.
That is why buying an index fund is such a hard investing strategy to beat. You get lots of diversification at a low price - what’s not to like?
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