Welcome to this first issue of Investors Ask where I post my answers to interesting questions from readers or members of the investment communities I engage in.
In this issue, I discuss what to I’d do with a small and overvalued position in my portfolio. Let’s dive in.
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When a very small position (MSFT, <2%) in a portfolio becomes overvalued—and you don’t feel like adding to it—what do you do?
In my opinion, any position should be sufficiently large to have a meaningful impact on portfolio performance. Otherwise, it’s simply not worth the effort of monitoring it.
Generally speaking, this disposition leads to me favoring large positions, say 10%+, over small positions positions. However, small positions can have meaningful impacts if they have sufficient upside.
Consider for instance the coal miner Alpha Metallurgical Resources, ticker AMR, which went up 157 fold from it’s COVID lows to it’s 2024 peak.
This return is of course outstanding, especially in less than four years. However, the market was not completely unreasonable when it sold off AMR in 2020. The company was in poor financial health and the pandemic would lead to operating losses for the foreseeable future.
There was a more-than-fair chance that AMR would not make it, so taking large position would be quite risky. If it did make it, however, the returns would obviously be outstanding. Even “just” returning to previous price levels would be a 25+ bagger, but massive share buybacks in 2023 pushed the stock price up much further. So even a small position could have a material impact on overall portfolio performance.
Now, in this case—if MSFT is indeed overvalued, implying low future expected returns—the stock is unlikely to have any material impact on the portfolio with just a <2% weighting.
I would sell this stock and move the proceeds into more attractive opportunities.
That’s it for now!
That’s it for now! If you have a question you’d like me to cover, leave a comment below.