Happy New Year!
As we begin 2020 we are trimming some positions in the AMM Dividend Growth strategy that currently exceed our maximum position size threshold.
So far we’ve trimmed Visa (V), MasterCard (MA), and Apple (AAPL). We’ll likely trim a few more before we’re done. Not every account will be affected as some accounts still hold these positions within our target range for the position, and other newer accounts may not hold one or more of these positions.
When we 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 it gets since your portfolio is now more 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 can lead to poor portfolio management.
Apple was one of 2019’s biggest winners, especially within the S&P 500, with a total return of 86%.
Apple accounted for 10% of the S&P 500’s total return in 2019.
In many client accounts Apple exceeded our maximum position size threshold because of this return. In these accounts, we sold Apple back down to our target weight.
Trimming a winning position is one of the hardest things to do in the day-to-day management of the AMM Dividend Growth Strategy. We have to overcome our regret aversion bias. If we trim Apple now and it continues to appreciate, we will regret missing out on the gain.
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.
Apple exists at the crossroads of hardware, software, and luxury consumer goods. It is susceptible to quick changes in investor sentiment as evidenced in the chart above.
The chart below is Apple’s Enterprise Value to EBITDA ratio, a valuation ratio, and it shows how far Apple’s EV/EBITDA multiple has expanded within one year.
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.