“Marie Kondo” Your Portfolio

I see the Angry Bear Cave newsletter resonated with some people. On Cue, the NDX fell 5%.

I just spent a long weekend with some of my pals from Lehman Brothers. We were all in the MBA associate class of 2001. They have all gone on to do great things. One of them is retired! The rest of us are still working stiffs, but in our early-mid 50s, we are thinking about ways to work less. Well, everyone except for me. I am still knife-fighting in the capital markets.

I want this newsletter to be a bit of a follow-up to last week’s. Here is something that you should be thinking about: Say you have a portfolio of stocks, and say that some weird newsletter guy told you that we were going to have a bear market, and that you took him seriously. So, you go through your portfolio, and you look at stock XYZ, and you say, Well, I can’t sell that; that should do well even in a bear market. And then you look at stock ABC, and you say, Well, I really like that stock, and it should do well in a bear market. And you go through your whole portfolio, and maybe you sell one or two dogs, but you leave everything else pretty much intact.

The reason I bring this up is because I have done this before. Faced with a bear market, I went through my portfolio and came to the conclusion that all these stocks were A-OK, I had good fundamental reasons to own them, and I didn’t want to sell them. Earth to ding-dong: If you have a bear market in stocks, all stocks are pretty much going to go down. You might have a few exceptions here or there but not many.

Emotional Attachment

The phenomenon I’m referring to here is called endowment effect. This is when you get emotionally attached to your stocks. This is a weird thing to get attached to! You might get emotionally attached to a stuffed animal you got when you were a child, or a picture of you and your grandfather who served in World War II, but a stock? You’re getting emotionally attached to a stock? Sell that thing and forget you ever owned it.

Of course, people can’t do this because of fear of future regret. What if I sell it, and the stock keeps going up? What, your plan is to top-tick it? That is a terrible plan. You made a boatload of money—just take the profits and pay your taxes and move on to the next trade. This is how portfolios get cut in half or worse; people get emotionally attached to a jumble of letters on their screen. I’m not the best trader in the world, but at least I don’t fall in love with my stocks. When it is time to sell, it is time to sell.

This is very easy to do with technology stocks because the growth story is so compelling. Take a stock like Nvidia—the demand for its chips would seem to be infinite, given the growth of AI. Why would you sell something that has a total addressable market (TAM) of several trillion dollars? Like I said, the story is very compelling. Look, maybe you sell it and it goes to a $10 trillion market cap, and you want to jump off a bridge. Or maybe you took the proceeds and invested in something else that… went up even more! I don’t get psychologically tied up in knots about this stuff. And by the way, the bull case is always most compelling at the top.

The Purge

I encourage you to go through your portfolio like you would go through your closet, looking to get rid of old clothes. I have a philosophy about clothes: The average piece of clothing should last you seven years. After that, you will either be too fat or it will be out of style. As someone who has a lot of clothes, every so often I will do a small purge and take stuff to Goodwill, and then Goodwill ends up with a lot of nice stuff. I am not nostalgic about it. I am not a hoarder. By the way, the definition of a hoarder is someone who has endowment effect about everything! Don’t be a stock hoarder. Clean some out and take them to Goodwill.

And if you want to be drastic, sell practically everything. In writing, they will tell you to kill your babies when you are editing. You should ruthlessly edit your own writing and cut stuff that doesn’t belong there, including the really good stuff. You don’t want a bunch of ticker clutter in your portfolio. Beyond about 15-20 stocks, it gets to be too much to keep track of. 

Marie Kondo that thing. If your stock does not spark joy, take it out to the trash can and wheel it out to the road.

Jared Dillian, MFA