Position Sizing in Portfolio Management
06/18/24
Blue Chip Partners: Quarterly Edge Q3 2024
07/15/24
In this episode of Blue Chip Now, Daniel Dusina, Matthew Mondoux, and Dan Seder discuss the steps and considerations for managing a portfolio during black swan events. This episode provides valuable insights into the thought process behind portfolio management when unexpected and significant market events occur.
Introduction to Black Swan Events (0:00 - 0:42):
Key Data: Daniel Dusina introduces the topic of black swan events, defining them as significant and unexpected market events. The discussion is sparked by a client question about potential actions if China invades Taiwan. The conversation also includes references to other significant events like the pandemic and Russia's invasion of Ukraine.
Initial Response and Fact Gathering (0:42 - 3:04):
Daniel emphasizes the importance of laying out all the facts when a black swan event occurs. This includes understanding what happened, why it happened, and the potential paths the event could take. The first step is to identify investments and asset classes exposed to the event and understand the revenue exposure at the company level.
Dealing with Unknowns and Making Assumptions (3:04 - 4:37):
Dan asks how to deal with unknowns, emphasizing the difficulty of making assumptions and estimates without immediate feedback. Daniel explains the importance of scenario analysis, laying out best-case, worst-case, and realistic scenarios for each event. The process includes identifying primary catalysts and risks for each investment.
Incremental Decision Making (4:37 - 7:42):
Matt explains that making an all-in-one decision, like going 100% to cash, is rarely part of the playbook. Instead, incremental decisions are preferred, such as adjusting cash levels and leaning into fixed income or domestic businesses. Dan highlights the importance of knowing one's timeframe and liquidity needs when making decisions.
Contrarian Approaches and Market Volatility (7:42 - 10:34):
Dan inquires about the possibility of taking a contrarian approach during a black swan event, such as becoming more aggressive as asset prices decline. Matt explains that while initial reactions may focus on loss prevention, quickly shifting to an opportunistic approach can be beneficial. He notes that market volatility is often short-lived due to interventions, like those seen during the pandemic.
Investment Committee and Process (10:34 - 13:19):
Committee Dynamics: Daniel and Matt discuss the importance of having an investment committee with diverse perspectives to avoid groupthink. Daniel highlights the benefits of combining different analysis approaches and making decisions incrementally. The discussion includes examples of recent decisions made by the committee, such as adjustments to positions in Johnson & Johnson and Eli Lilly.
Media Influence and Balanced Opinions (13:19 - 16:04):
Media Impact: Matt and Dan discuss how media coverage often lacks balanced opinions, focusing on extreme views. They emphasize the importance of having a structured process and avoiding emotional decisions influenced by media. The role of the investment committee in providing balanced perspectives is highlighted.
Probabilities vs. Possibilities (16:04 - 18:27):
Dan explains the importance of focusing on probabilities rather than possibilities when managing investments. He compares the approach to the unlikely event of a plane accident, emphasizing the need to manage portfolios based on probable scenarios rather than unlikely events.
Final Thoughts (18:27 - 20:43):
Daniel stresses the importance of having a flexible and adaptable process for managing black swan events. He also highlights the value of conducting postmortem analyses to learn from past decisions and improve future outcomes. The episode concludes with a reminder of the importance of learning from mistakes and continuously refining the investment process.
Key Takeaways for Investors:
- Fact Gathering: Lay out all relevant facts to understand the situation fully.
- Scenario Analysis: Develop best-case, worst-case, and realistic scenarios for decision-making.
- Incremental Decisions: Avoid all-in-one decisions; make adjustments incrementally.
- Balanced Perspective: Avoid media-driven extremes; rely on a structured process.
- Focus on Probabilities: Manage portfolios based on likely scenarios, not unlikely possibilities.
Stay tuned for more insightful episodes of Blue Chip Now!, where we continue to explore critical topics in the financial and economic landscape. Share this episode with friends and colleagues who might benefit from these valuable insights.
What should your portfolio manager be doing in the grips of a black swan event like a pandemic or natural disaster?
The steps we take to preserve capital and ultimately make money
What can we do to prevent or mitigate losses if another pandemic hits? A client asked us, “what would you do if China invaded Taiwan?” There are many scenarios that could occur on a global scale that cause similar effects: large scale natural disasters like floods and fires, another global pandemic, and more. No matter what the crisis is, our process remains the same and helps to mitigate the volatility our investors experience when times turn turbulent. Tune in to hear exactly how we approach global crises as portfolio managers.
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Close to retirement? How much cash should you have on hand in case of another global crisis?
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What should your portfolio manager be doing in the grips of a black swan event like a pandemic or natural disaster? Watch the full episode here https://youtu.be/H0oWhWZ8s2c?si=UdRqK6LTDuCeE2-7
It is comforting to have an investment committee, especially in times of a global crisis, so we can limit ourselves from internal biases. Emotional decision making is the number one thing to avoid when managing a portfolio of investments. Here at Blue Chip Partners, we have a dynamic team of differing opinions and a structure that leads us to the best possible outcome when it comes to investing. We have members of our team that lean towards fundamental analysis and others that lean on technical analysis.
We don’t make all or nothing decisions here at Blue Chip. We are strategic when we choose to invest, and we don’t overcommit to any one company. For the last 20 years we have approached portfolio management in a process-driven manner, which has aided in the firm’s growth to 30 employees and $1.3B under management.
We all know that the media influences the population’s investment decisions during a global crisis. The media doesn’t know your unique circumstances. If you don’t already have an advisor you trust, our recommendation is for you to stop taking investment advice from news anchors. A balanced opinion isn’t sexy enough for the media. These news outlets don’t know your unique circumstances and they don’t have your best financial interest in mind.
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