No. of Recommendations: 2
A while ago I diversified a little away from BRK, currently owning around 10 different stocks (2 of them based on Jim: DG and KMX). I tried to value each of them based on current Market Cap + Revenue and expected Growth + Op.Margin during the next 5 years, resulting in the multiple of expected profits in 5 years one has to pay today (also based on Jim).
A simple formula tells me, based on this "Cheapness Index", how many % of my portfolio to put in each of those stocks. As cheaper as more. If for stock X the multiple to pay now of the expected profits in 5 years is 6 then I buy double the amount of that stock than of stock Y where that multiple is 12 and which therefore has only half the "Cheapness" of X.
Based on a total portfolio value of $100,000 in the begining my table in principle looked like this:
Stock Multiple Planned % Current % Difference
of portfolio of portfolio
Meta 3.8 3.0% 0,0% +3,000
Carmax 4.0 2.9% 0,0% +2,900
Verizon 6.7 1.7% 0,0% +1,700
.......
.......
In the first months of this year I've done the buying accordingly, so in this example I would have put $3,000 in Meta, $2900 in Carmax and $1700 in Verizon.
Now here is the problem: Naturally those 10 stocks developed differently. Price and therefore market cap changed, one of the 4 variables determining expected "Multiple", the supposed "Cheapness" of each stock, which in turn determines how many % of the portfolio should be invested in it. The above example now looks like this (not exactly, because I did buy less Verizon than planned and sold some Meta calls):
Stock Multiple Planned % Current % Difference
of portfolio of portfolio
Meta 4.3 2.5% 3,2% -700
Carmax 4.9 2.2% 3,3% -1,100
Verizon 5.9 1.8% 1,1% +700
So to again reach the percentages each stock should be in this portfolio, based on it's supposed "cheapness", I now would have to sell some Meta and Carmax after their rise (because of them being a bit less cheap now) and buy some Verizon after it having fallen and supposedly gotten even cheaper than before.
If one thinks this through it makes no sense because: Market Cap changes every day. With otherwise unchanged expectations every single day "cheapness" changes and the portfolio needs to be rebalanced. Nonsense as it means the very moment a supposedly cheap stock starts to do what you expect, to rise, you immediatedly sell a bit of it.
How to handle this in practice?
No rebalancing at all also seems nonsensical because the whole point is to buy more when something is supposedly cheap. If it's price rises it gets less cheap if everything else is unchanged so at some point there should be some rebalancing by selling something not that cheap anymore for something else that's supposedly cheaper now. But when to rebalance? How often?
