Portfolio construction – Weighting
I think valuation is one of the easiest parts in finance but just like everything else there is no real answer as to what a company is worth because it is a market and there are multiple types of buyers/sellers, you have cashflows, but then one can layer on brand value, market position, industry type, multiples etc etc but still its a relative straightforward exercise. But how do you weight a position once you’ve decided that it’s worthwhile for being part of your portfolio?

Weighting will take into consideration 1) sizing 2) timing 3) holding period, regardless of how good a stock picker/analyst you are if you don’t weight your positions correctly your performance may not reflect it your abilities in choosing good investments. Simple example, you have 2 names in your portfolio, 1 is weighted at 90% and stays flat, the 2nd weighted at 10% increases by 50%, so your overall portfolio only increases +5%, even though from 2 names you picked one that increased by 50%!

So how does one decide on the sizing? How does one know when to add/reduce to the position. Sure you can mention the risk/return of the business, the pricing, the liquidity of the stock but these are all factors that change daily/weekly/quarterly/annually. And then we can continue onto the discussion of how many positions is right? 5? 10? 15? 20? 30? There are only so many grade A companies that have great returns on capital and yes we would all love to have a portfolio comprised of only the best in the world, the best in the industry etc etc but normally these are quite fairly priced, so then one does look at Grade B or Grade C companies, that may have great upside but do not necessarily have the best management teams nor the best returns on capital but may look attractive on a pricing basis.

Philip Fisher’s investment strategy was to focus the bulk of his portfolio into a few positions, and to look for businesses with a long growth runway ahead. Benjamin Graham’s investment strategy was to purchase stocks for less than their intrinsic value; classic value investing. Warren Buffett looks for solid growth businesses that are trading at fair or better prices, not cheap businesses that have adequate growth.

And this is both the most wonderful & frustrating part of investments, there’s no real answer. Everyone has their own preferences, beliefs and ideas.

The Bank of England considering digital currencies
I’m fairly certain that at some point in the near future we’ll see a shift towards a cashless society, but how and when are the two main questions involved here so I found it quite interesting that the BoE is looking at this now…
There are several different ways in which a central bank might make use of a digital currency. It could be used as a new way of undertaking interbank settlement, or it could be made available to a wider range of banks and NBFIs. In principle, it might also be made available to non-financial firms and individuals generally, as banknotes are today. The costs and benefits for monetary and financial stability would likely vary in the different cases, being more pronounced the more widely a digital currency is held. For example, making central bank money widely available could have an impact on deposits held at commercial banks and a knock-on effect on the banking system. Another relevant issue is the impact that offering a new method of settlement in central bank money would have on existing payment systems

Source: Payment21