How I look at my portfolio allocation
Update week 49 2023
A recurring question from readers is what percentage I maintain per share in my portfolio or what percentage I purchase. I wrote a book in Dutch in which I classified my stocks according to a system loosely based on chess pieces. The most important stocks were the queens and rooks, below them we found bishops, and finally the calculated gambles, the pawns.
I still find it very valuable to consider whether a stock is a quality stock (queens and rooks), where you rely on the execution and growth of the company. Or if you are more focused on an, in our view, incorrect undervaluation, where quality is less important. Where you rely on profit mainly through a revaluation of the stock and not on the company's performance (bishops).
The book was written in 2019, and meanwhile, my view has evolved. I have since left the calculated gambles or pawns for what they are. They were a lot of work for a very small part of the portfolio, and in the end, they broke even. The big profits from one covered the losses from the other.
Shares of true top quality, we couldn't pick them up at fair prices in recent years, so the holdings have mainly turned out to be my queens.
In other words, I operate more and more at the intersection of quality and value, between the bishops and the rooks.
However, I still have a subdivision for myself in the Value Selection between what I call Core Positions and the Value Plays. Among the Value Plays, we find stocks like Bonava where I invest purely on undervaluation. We know that these are riskier companies, where the intrinsic value is expected to decrease, but we assume that the stock price already takes this into account more than enough. Most stocks, however, are companies that simply perform, achieve decent to great returns, and grow, some more than others.
The difference between what, for me, constitutes a Core Position and what is a Value Play is primarily driven by how well I think I can assess the future. For example, I believe I can assess the future of Smartphoto much better than that of other positions in my portfolio, so it carries more weight.
Therefore, except for stocks like Bonava, it's not about which company is of the highest quality or which company has the most growth potential, but rather about how I think I can assess the future.
Because each of us has our own knowledge and experience, certain stocks may be considered core positions for you that differ from what I consider core positions. Sometimes, it's also just because I have been following a company for a very long time and, as a result, have a good understanding of it, leading it to become a core position.
What is the practical difference in capital allocation for me?
A core position, I will purchase for about twice the amount compared to a value play. While I will buy 2.5% to 4% of a value play, for a core position, it's 5% to 8%. Although the latter is seldom done in one go but in two or three steps.
This means that I usually buy about 2.5% to 3% of a stock as the initial purchase. I rarely make additional purchases for value plays. Sometimes, I buy an even smaller position, often because I want to get to know the company better, and I simply monitor it more closely when it's in the portfolio.
My philosophy is also to let a stock grow. For both core positions and value plays, I will not sell quickly just because a stock has grown into a large position in the portfolio or a certain percentage has been exceeded. However, often, when these positions become a large position it also means that there has been a substantial price increase, and the potential future return is now reduced. That can be a reason to sell or reduce the position and put the money to work elsewhere.
Additionally, there is the question of the distribution between holdings and the Value Selection. I base this distribution on my expectations of how long I will continue working.
My goal is to allocate about 75% to 80% to holdings and real estate by the time I stop working. For now, with a long working time still in mind (if I ever stop), it is more in the range of 30% to 40% in holdings (excluding real estate). But I am monitoring the companies every day. If I were not, I might lean more towards 50% to 60% in holdings and REIT’s. I don't have gold, bonds, or other investments, only physical real estate from the past.
Update
Every week (except for holidays and when there is no news), I publish a post with all the newsworthy facts and the analysis of reports published by our companies. You will find companies in the selection list and in these updates that don’t have an initial analysis yet. This is because I have been writing in Dutch for years, and I want to include my full selection here as well. I will make a full report of each of these stocks (unless I sell them) in the coming weeks/months.
This week: