Welcome to the 10th episode of the AMM Dividend Growth Podcast. I’m Glenn Busch a portfolio manager at American Money Management. We’re an RIA based in San Diego.
To start 2020 we’re trimming some positions.
So far we’ve trimmed Visa (V), MasterCard (MA), and Apple (AAPL). We’ll likely trim a few more not covered in this episode.
But before I get into why we’ve trimmed these positions let’s do the disclaimer.
First when I say trim a position, we’re not selling the entire position. We’re taking a stock we still like and bringing its percentage weight back down to our target range. The bigger a position gets, the riskier your portfolio becomes since your portfolio is now heavily dependent on a single position.
We have maximum position size rules for every stock in our portfolio. This helps us avoid our innate behavioral biases that causes portfolio management.
And this was the main reason why we trimmed Visa and MasterCard.
Our portfolio is concentrated in 25-30 names. Because they are a duopoly Visa and MasterCard act almost as one position. They are also are two of our heavier weighted positions. From a portfolio perspective, we’re already overweight payments. And because Visa and MasterCard have done so well the last couple of years they’ve become too overweight in a handful of accounts. So we trimmed these back down to our target. Our target weights for Visa and MasterCard still makes these two of our largest positions. We target 4% for each of them for a portfolio 100% invested in our dividend growth strategy.
We trimmed Apple because of these same portfolio rules and in part due to recent valuations.
Apple was one of 2019’s biggest winners, especially within the S&P 500. It generated a total return of 86%.
Apple by itself accounted for 10% of the S&P 500’s total return in 2019.
Because of this great return, Apple exceeded our maximum position size in many accounts. So in these accounts, we sold Apple back down to our target weight.
Trimming a winning position is one of the hardest things to do for us in the day-to-day management of a portfolio. We have to overcome our regret aversion bias.
If you don’t know what regret aversion bias is it is, as described by Daniel Crosby in his book, The Behavioral Investor, when people are more upset with themselves when taking action and suffering a loss than when staying put and suffering the same loss.
If we trim Apple now and it continues to appreciate, we will regret missing out on the extra gains.
But our maximum position size threshold is a reminder that stocks don’t go up in a straight line. Before Apple returned 86% it lost over 36% from its previous all-time high.
And it has happened many times before with recent large declines in 2013, 2016, and a bunch of other 10-15% declines in between.
The other reason why we’re bringing Apple back down is how far its valuation multiples have run over the last year.
Apple EV/EBITDA ratio went from less than 10 a year ago to 16 times at the end of 2019.
Apple is not the same bargain it was a year ago.
This doesn’t mean we don’t like the company or its prospects. We do. We still own Apple and still like its future.
But given how far its stock has run, how far its valuation multiple has expanded, and how large it is in accounts, we think it is prudent to bring the position back down to its target weight.
Apple exists at the crossroads of hardware, software, and luxury consumer goods. It is susceptible to quick changes in investor sentiment and will have more large drawdowns. And our goal is when investor sentiment shifts and a large drawdown occurs and the valuation is right, is to buy Apple and bring it back up to its target weight.
Thank you for listening to this portfolio update episode. Our dividend growth strategy is open to individuals and if you’re an advisor we offer it as a separately managed account too. To learn more about us and our dividend growth strategy head on over to www.amminvest.com. That’s Alpha Mike Mike invest.com. Or give me a call at 858-755-0909.
Until next time.