Portfolio Management


One can learn modern portfolio theory, and still not be able to invest like the successful investor. Modern portfolio theory is the culmination of ideas that in no way correlate to investing success. Instead of modern portfolio theory, the successful investor practises good old portfolio management.

For instance, the successful investor holds only quality businesses in his portfolio. He does not diversify by industry, sector, or country. And he certainly does not rebalance asset classes. He manages quality businesses in his portfolio, in the form of equity. Bonds, gold, and GIC’s are not quality investments. The successful investor manages his portfolio like he would a holding company. He creates a consolidated report annually, consisting of his portfolio’s average revenue, net income, profit margin, and return on equity. His main focus is on both profit margin and return on equity, for he knows those two metrics determine the core growth of his portfolio.

Annually, the successful investor plots his portfolio’s capital appreciation, or price advance, against the S&P 500. He makes sure to beat the S&P 500’s total return by 5%, but is not devastated if he misses that mark. Also, he averages the dividend yield on his portfolio and calculates the dividend income he receives from his portfolio each year, while noting its annual growth. Annually, the successful investor reinvests his dividends in new holdings or shores up current holdings if valuations are attractive. And, if cash is available that was not deployed throughout the year for stock purchases, the successful investor conducts a stock screen on the S&P 500 and S&P/TSX to filter attractive stocks of quality businesses. If attractive stocks are found, he will purchase those stocks, if not, he will reinvest in current holdings. The successful investor does not succumb to investing in hundreds of businesses. He manages a focused portfolio of about 7 to 30 businesses with clear competitive advantages, and only adds businesses that will maintain his portfolio’s average profit margin and return on equity. Logically then, he does not erode his portfolio’s value.

The successful investor does not check his portfolio daily; for he knows his businesses are running smoothly and are constantly building shareholder value. Quarterly, however, the successful investor checks his portfolio for dividend income earned from the businesses he owns. This makes him happy and proud owner of these successful businesses. Moreover, the successful investor dislikes very much selling his quality businesses. If a quality business generates consistently growing income, why should he sell that business? However, the successful investor does sell a business when its underlying fundamentals deteriorate considerably, pulling down his portfolio’s profit margin and return on equity to historical lows. However, the successful investor is o.k with holding good quality businesses, for he knows his great quality businesses maintain his portfolio’s high returns. If he were to sell every great quality business that turned good quality, he would incur significant brokerage costs. Only quality businesses that are deteriorating significantly are sold.

In all, the successful investor invests in quality businesses with clear competitive advantages, reports on their performance, builds his stake in those quality businesses and invests in new quality businesses annually, watches his dividend income, not stock prices, and in turn, becomes wealthy.

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Chapter from my e-book Lessons From The Successful Investor
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3 thoughts on “Portfolio Management

  1. I very much enjoyed and appreciate your talk at the U of T Investing for Beginners. Your altruism, openness and enthusiasm will continue to carry you very far indeed in the world of commerce.
    Best Wishes
    Albert Silver

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