It was only after staring at 70 stock positions I knew nothing about that I understood that I was, right then, buying those positions every day.
Eight years ago, I became the manager of a $100 million hedge fund. The fund had been around for three years. The portfolio manager I was taking over from had put together a broad portfolio of stocks, bonds, currencies and options from a dozen markets and twice as many countries. Each position — that is, every asset that the fund owned— had a history.
Each position had a story and a reason that it was there. It might have been because a stock was cheap, or the company’s management was fantastic, or a big dividend was coming up, or that it was an unloved and beaten up stock that was coming back into favor.
On my first day on the job, my boss told me, “I’d like you to look at every position in the portfolio. Learn the story and why it’s in the portfolio. And then ask yourself if you would buy it today, right now. Because by having it in the portfolio, that’s what you’re doing.”
At first I didn’t understand what he meant. A stock in the portfolio was a holding… so the portfolio was, well, holding it. It had already been bought at some point in the past. I told myself I wasn’t the person responsible for the stock “being bought” now — someone else already had.
But he was right. Every position was taking up capital — actual cash — of the fund. If that cash wasn’t being used for that position, it could be available to buy a different security. So, by holding a position I was really “buying” that position — each and every day that it was in my portfolio.
This also makes sense outside of a stock portfolio. Think of what you own — all of your assets — and ask yourself: “If I had the cash in my hand to buy this right now, instead of the thing itself (whether it’s a stock, a bond, a house, or a car), would I still buy it right now?”
Sometimes you don’t have a choice. You need a place to live, so dreaming of what you’d do with the cash you’d receive from selling your house right now might be just a dream. And your old car might not be worth much, and you can’t compare its current value to what you bought it for when it was new.
But you may own other assets that, if you could do it again, you wouldn’t buy. You might be able to get something that works better, you like more, suits your needs better, or something that’s just a color you prefer. In the case of stocks or bonds, you might be able to put the money towards a different stock that has better potential or that pays a better dividend. Every day that you’re holding onto a loser, you’re using valuable capital that you could put to better use. Each day you own that asset — boat or stock or wheelbarrow or ring — you’re using money to own it, money that you could use for another purpose.
That’s why every day you are “buying” something that you already own.
I learned the stories of the 70 securities in the portfolio. I wound up selling about half of them to free up capital to buy different assets that I felt good about “buying” every day.
