This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Reconstructing My All-Cap Value Portfolio

The moves that I made in February represent an evolution in my approach to managing the All-Cap Value portfolio. As I stated in this post back in September of 2012, my emphasis has been on buying stocks of what I believe are good companies, when I believe that they are cheap.

The result of such a strategy is typically a highly concentrated portfolio, based on my belief that in normal times the market simply does not serve up a steady stream of attractive quotes on high quality stocks on a regular basis.

While I don't have a problem with holding a highly concentrated portfolio of companies that I have a high degree of confidence in, lately I have found myself unable to find enough opportunities to fill out the portfolio.

As a result, in recent months I have held large cash positions and big positions in the Vanguard Total Stock Market Fund (VTI), a proxy for the broad U.S. market. While there is something to be said for both of these options, there is a third option for filling out the portfolio that I believe is superior to either and more appropriate for a value portfolio.

That option is to hold a basket of stocks selected primarily on cheapness and secondarily on quality. As each position in the basket is much smaller than positions selected for value and high quality, the risk of holding lower quality stocks is diminished to the entire portfolio taken as a whole.

This approach goes all the way back to Ben Graham. In more recent times, numerous published studies, including one of my own, show that diversified portfolios of stocks selected on value or a combination of value and quality have historically outperformed the market and yielded what I believe are possibly attractive returns to investors who have the discipline to stay with the strategies.

Going forward then, the portfolio will be split between larger positions that will make up at least five percent but no more than twenty percent of the portfolio when initiated, and a basket of smaller positions with each holding typically accounting for one to two percent of the portfolio when initiated.

Another way of putting this is that part of the portfolio will be managed with an active value style and the remainder will be managed with a more passive value style. The proportion of the portfolio allocated to each style will vary with the number of high conviction ideas that I hold at a particular time.

To review my moves in February, I swapped out of my large position in the Vanguard Total Stock Market Fund (VTI) and roughly half of my large position in Berkshire Hathaway (BRK-B).

I replaced these holdings with a basket of 14 stocks that I judged to be undervalued based on my rigorously tested quantitative and qualitative criteria, and with increases in the portfolio's positions in Microsoft (MSFT) and Chesapeake Energy (CHK).

I was confident enough to move on such a large number of stocks at one time because I was already familiar with the names and because the position sizes for the individual stocks in the basket were small relative to the portfolio.

The investments discussed are held in client accounts as of March 1, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.

Patrick Larkin

Patrick Larkin

I am a professor of finance and a serious individual investor. I have published a number of articles in peer


Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,959.44 +154.64 0.87%
S&P 500 2,078.54 +7.89 0.38%
NASDAQ 4,781.4240 +16.0440 0.34%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs