11 June 2013

Risk Management -- reduce holdings on Power Roots.

I had just sold half of my holdings on Power Roots yesterday.

In his book Common Stocks and Uncommon Profits, Philip Fisher mention that there are on three reasons where a good stocks should be sold:
  •  We had made an error in our assessment of the company.
  •  The fundamental of company has deteriorated and no longer meets our requirement.
  •  We found a better investment which could provide higher long term results.
The fundamentals of Power Root remain great since I invested...
In fact, it performed well much better than I expected initially.
So according to Fisher's points I had no reason of selling it now unless there's is a much better investment opportunity.

Incidentally, I just found a great company recently that meets my long-term-investment strategy, and the cash on hand is limited... So this sale of some Power Roots share just come at a right time to fund my new investment.

 x x x

However, there's a more important reason for the reduction in holdings -- to accomplish my portfolio's diversification policy.

For risk management purpose, I always want to maintain an adequate degree of diversification. So, I had set some guidelines to limit my exposure to any single companies or industry.

My portfolio contain companies of different sizes, and I had set different exposure limit for different size of companies. The reason is obvious -- smaller companies tend to have higher risk than big ones, hence should take up smaller share in a portfolio.

For companies below RM1 billion (market capital) I had set a 10% limit for their weight, while big companies like Harta and LPI could have a limit as high as 20%... At the same time, I also make sure that the weight on any single industry must not exceeded 30%. (currently my holdings on gloves, namely Harta, Supermx, Kossan had a total weight of ~28%).

Power Root is the smallest company in my portfolio (mkt cap ~670m). It weight only ~5%  when I invested in it. However, the share price climbed up so fast that the weight come to ~12% recently. This make me a bit uncomfortable, hence the reduction of holding came into place.

 x x x

After selling half of the investment, the weight of Power Roots had now become ~6% in the portfolio. I will be holding this part of shares as long as the fundamentals of the company remain strong...

In future if the share price of Power Roots boost up for another round and break my 10% mark again, I would probably just keep it then, because by that time it would be considered as a medium size company already.


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