My team and I have been discussing and considering portfolio turnover, and we were curious to hear what other teams had to say. In one training session, we were told that there is considerable variance, even among experts, when deciding how often a portfolio should turn over. We were curious if we could come to a consensus, or at least discuss the topic, as an EMC community.
Additionally, and more specifically to this competition, how quickly should we dump a stock which isn't performing well? We understand that much of the grading criteria are strategy-related, but 20% of the grade is performance. How have other teams been striking a balance between sticking to long-term strategy while also seeing good stock-growth?
With this post, we hope to inspire good EMC community discussion. We are interested to hear the thoughts of the professors, students, and our peers.
Portfolio turnover is a fascinating topic. To begin, if a stock in a portfolio is not performing well, perhaps it can make sense to buy more shares thus lowering your basis. This stands if the fundamentals remain solid and the business model and economic environment are still liked.
ReplyDeleteIn terms of dumping a stock, as we have mentioned throughout the program, there really is no right or wrong answer. It comes to down to each team’s selling strategy, or discipline. For example, if a stock drops 5%, you might strategize to buy more shares. However, if that stock drops below a certain price point or fixed percent which you determine, you might decide to just cut your losses.
If a stock has been underperforming and your portfolio is getting hurt because of it but you still believe that the company makes sense for your portfolio, your rationale on holding and/or buying more will hold more weight than performance. Nobody can time the market.
Lastly, we do know that in many cases, your rationale can potentially take more than a year to play out. To give an example, the cost of shipping drybulk cargoes is very cheap now given the fact that interest rates are so low and money is so cheap – there is a lot of demand for such raw materials. As a result, a lot of shipping stocks have been poorly performing.
Now, nobody knows exactly when interest rates will rise… They can rise in two years or surprise many economists and rise in a few months (many think late 2011, early 2012). Nonetheless, they will rise. Because interest rates theoretically cannot get much lower, buying a shipping stock makes sense for a value initiative. The stock can remain a burden to a portfolio and continue underperforming arguably until interest rates rise and the cost of shipping adjusts accordingly – then the investment makes sense. Again, we cannot time market events and monetary policy, we can only make assumptions.
It’s the rational that counts here – don’t worry about timing the market.