Managing a large portfolio

Buying is only the beginning of investing but being an inveterate stock picker that's the bit I focus on. Managing a large portfolio, monitoring the holdings, and deciding when to sell, I'm much less disciplined about.

This January, the editor of Money Observer will, as has become customary, put a metaphorical gun to my head. He's asked me to write about the Share Sleuth portfolio's top ten holdings, not the biggest, but the companies I'd be most likely to invest in were I starting all over again.

Comparing twenty-four disparate companies feels like a tall order, but I should be doing it any way, if only to find out which are no longer suitable. When I started the portfolio I wanted to give each company three years to prove itself and time is up.

My solution harks back to one of my favourite posts, published on this blog nearly four years ago, a post that defined how I would add shares to the portfolio. It relayed a speech Benjamin Graham made in 1958 decrying the "new speculation."

When Graham started investing forty years earlier, a stock was speculative if the business was speculative, companies with poor records of profitability or lots of debt for example. Investors did not pay much for such shares.

As the fifties ended, Graham warned investors were paying way more than corporate assets or past earnings implied they should. They were paying for the promise of growth. It was the price of the investment, and not the business itself that was often speculative.

This principle has inspired generations of value investors to avoid, as much as is possible, either kind of speculation and own good companies at cheap, or at least reasonable prices.

But sometimes shares confound us. Their prices rise to levels that no longer look safe, or the business will crumble and reveal weakness where we saw strength. Time for a reckoning.

I'm creating a matrix, the simplest of them all, a 2X2 assessing the relative safety of every member of the portfolio. In the top left quadrant will go companies that are safe on both counts. In the bottom right quadrant companies that are safe on neither count, and in the other two quadrants, companies that are safe on one count but not the other.

Here's the matrix, with Games Workshop and French Connection placed in it:

Games Workshop is in the upper left quadrant. The business seems very safe. It controls every aspect of designing, making, and selling fantasy war games and models, it's financially sound, conservatively managed, and largely dependent on little more than satisfied customers gradually spreading the word. Its market valuation is reaching the kind of levels that make me nervy though, so it's positioned at the bottom of the safe end of the price axis.

French Connection is teetering on the brink of the lower right quadrant. Stores in the UK and Europe are making losses and they are mostly rented on long-leases, which the company may be having difficulty shedding. Although, it has wholesale and licensing businesses that in recent years have sometimes dragged the group into profit, it's a dangerous business to be in because there are other pressures too: French Connection's not as fashionable as it was, and the Internet has intensified competition. Comparing its share price to its book value French Connection looks very cheap, but that might not mean much unless it can turn the shops around. 

Once I've evaluated the other twenty-two companies the matrix will be complete, and I'll know just how closely the Share Sleuth portfolio matches my value principles.

I'm a little nervous.