Importance of Diversification and Scaling in with Small Positions

Recent gains in the portfolio went as high as 5% despite being only about 50% invested, meaning that real gains reached the 10% mark within about three months. Every position was bought small initially and added to in small increments on pullbacks. Had there been more pullbacks - and we were primarily waiting for a pullback to SPX 1200 - the position sizes could have been further increased.

The fact that those pullbacks never came does not in my view suggest that we should have been more aggressive in building the positions and getting closer to 100% invested as the stocks increased in value. Had there been deep pullbacks such as occurred in the two examples below, we would still have had the funds necessary to buy more shares at drastically lower prices.


Before:




After:




Before:




After:




Every moment is different and there are no magic formulas for accumulating stocks, so being patient and waiting for opportunities to buy at better prices is the best we can do. Looking forward, we can try to accumulate new positions more aggressively, but given our recent accomplishments, it seems that maintaining enough cash in the account to add on pullbacks works quite well.

Once you've seen your positions like the ones above gap lower by 20% overnight, the importance of being diversified and maintaining a healthy cash reserve becomes more obvious and natural.